An income theme is clearly evident among the 33 funds that made FE AFI debuts in November. New dividend-paying funds include equities and bonds and range across the globe in exposure.
At every six-month rebalancing of the FE Adviser Fund Indices (AFI) there are funds that come into the portfolios for the first time. In the latest rebalancing, in November, 33 funds were new to one or more of the three AFI portfolios.
Ben Willis, the head of research at Whitechurch Securities and an AFI panellist, made several changes to his portfolios.
“In [the] Aggressive [portfolio] we’ve always been aggressive, and prepared to take that view. We’re paid to take on that risk. We made a tactical change – we’d held Legg Mason US Equity, but its deep value style has been out of favour for a long time. It was just too volatile.”
In its place, Willis added as a new entrant a fund that Whitechurch has held for some time, JPM US Equity Income. “We like the equity income story, the power of dividends both at home and abroad,” says Willis. (AFI continues below)
“This fund does well when markets are falling and also captures upside. You already have the dividend stream, and it holds large-cap global brands so it should weather any short-term volatility.”
The income theme is clearly visible in the AFI portfolios: 12 of the new entrants are income funds. They include both equity and fixed income funds, and range across the globe with regional exposure, including America, Britain, Europe and Japan.
Darius McDermott, the managing director of Chelsea Financial Services and an FE AFI panellist, is an advocate of this theme. “As a general macro view the crystal ball is as cloudy as ever, but what we’ll be pushing to clients next year is dividends and income. These funds are all on our buy list. It comes down to the fact people are really not sure; they’d rather bank their dividends. And two thirds of equity returns over 100 years have come from the compounding of dividends.”
Willis also made a switch in his AFI Balanced portfolio. “We’ve got some bond exposure in Balanced,” he says. “We sold out of a long-term holding, Invesco Perpetual Monthly Income Plus, which has done very well, but we wanted to de-risk the portfolio. It has 20% in equities run by Neil Woodford, and bond managers Paul Read and Paul Causer believe in buying financial debt, which is higher risk. We do like financial bonds, but with the 20% equities kicker we thought we could protect the Balanced portfolio a bit more.”
Willis replaced it with the Jupiter Strategic Bond fund. “Even though [the manager] likes high yield and financials, he’s been cautious when he needs to be – for example, buying Australian government bonds. It’s held up better than its peers on a risk adjusted basis,” he says.
In his AFI Cautious portfolio, Willis added another new entry – also a fund Whitechurch has held previously. “We had Schroder Income Maximiser, looking on a total return basis. It’s always been a deep value style. The new managers who took it over also run Schroder Recovery and they’ve tried to use that same investment process, so that probably means going into very beaten-up areas of the market which are very cyclical.”
Willis says he found the volatility of the Schroder fund too hard to stomach. “We needed something to grind out some nice steady returns, and one fund we found which has managed to out-Woodford Woodford is Trojan Income. [It’s manager, Francis Brooke] is running family money. He’s always very cautious and has a high weighting to cash. It’s a large cap, defensive fund.”
Chelsea did not change its portfolios, but McDermott highlights one fund the firm has added to its buy list and which was a new AFI entrant: Axa Framlington American Growth.
“I’m not surprised it’s gone on there,” he says. “It’s been a struggle to find funds in America that outperform. But the Axa Framlington fund is very consistent. We like Stephen Kelly’s growth strategy. We generally feel growth is the way to play the US market.”
Willis reckons Whitechurch has always been good at backing new fund launches, so for him funds do not have to be particularly large or have a long record to make it into the firm’s own and its AFI portfolios.
“If a fund manager moved to a new company, they’re always quite hungry in the first couple of years,” he says. “That can work out well for us, and it can prove prudent to put money with them.”