A number of these funds in the UK can be found in the Morningstar Moderate Allocation Category. Their equity exposure usually sits in the 40%-60% range, and the rest of the assets are made up of fixed Income and/or other alternative investments.
But how to navigate this group of funds? Jonathan Miller, director of Manager Research at Morningstar UK, has some tips on how to pick the right multi-asset income fund for your needs:
Don’t Just Look at Yields
While yield is an important factor in evaluating income multi-assets funds, it is not the only one worth looking at. Miller says it’s worth looking instead at the stability of the capital – that is, the price return over a long period of time.
“Given the stock market declines this year, strategies focusing on income are showing what might be perceived as an attractive yield, but it’s illusory,” explains Miller. “Dividends have been slashed and as yields are quoted on a historical 12-month basis, the yield gives no real indication of the upcoming direction of travel.”
For example, comparing the five largest income funds in the Morningstar Moderate Allocation category, it is striking that the lowest-yielding fund, Bronze-Rated Jupiter Merlin Income, is also the best performer.
This means, as shown in the table above, that an investment of £100,000 at the end of September 2015 in the fund would be now worth £112,406. While the same could not be said, for instance, for Neutral-Rated Invesco Distribution and Bronze-Rated Premier Multi-Asset Distribution, which have higher yields but have produced less capital.
“The yield level for the Jupiter funds may be deemed too low for some, but framing the capital base alongside how the income payout has changed over time helps provide a moure rounded assessments,” explains Miller.
Other Things to Keep in Mind
According to Miller, there are a few things investors should look at when weighing the pros and cons of an income fund: the overall investment approach, the associated fund-of-fund fees, and the types of alternative assets used by managers, “as they can have a bearing on both the funds’ distributions and overall performance”, he says.
For example, in case of the Jupiter fund, manager John Chatfeild-Roberts has a total return mindset. Miller points out that the main holdings in fixed income have been on the cautious side, and the largest holding overall, Evenlode Income, has generally yielded less than the FTSE All-Share Index but has strongly outperformed. Miller adds: “The Jupiter fund has also held physical gold (currently an 8.7% position), which is a zero-yielding asset but one that has helped recent absolute performance.”
Meanwhile, the Premier Multi-Asset Distribution, invests in a number of investment trusts, which has kept the volatility of its distributions low over the years, but has meant a hit to its performance over the past year as the share prices of these trusts have dipped.
Overall, there are a number of elements people should consider before investing in income, but one thing is sure: “Investors should rely less on the quoted yield number and instead pay more attention to the absolute amount in pounds and pence that they receive,” says Miller. “More information and planning around these aspects, over and above focusing on yield, can help map out better outcomes for investors looking to meet their goals.”