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Monthly income - Repeat performance

Date: 31 May 2022

Repeat performance:

For the second year in a row, both Quilter Investors income portfolios comfortably beat income forecasts for the fiscal year to 30 April.

Portfolio managers Helen Bradshaw and CJ Cowan explain how this came about.

How did you fare against last year’s income forecasts?

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Helen Bradshaw, Portfolio Manager

“This time last year, when we published our income forecasts for the ‘fiscal year’ to the end of April 2022, we predicted income in a range of 3p to 3.4p1 per share for the Monthly Income Portfolio and a range of 2.9p to 3.3p per share for the Monthly Income & Growth Portfolio.

“Now that another financial year has come to an end, we’re pleased to report that, for a second consecutive year, we were able to deliver a materially higher level of income than we had forecast, resulting in a marked uplift to income versus the previous financial year.

“Over the fiscal year to the end of April 2022, the Quilter Investors Monthly Income Portfolio delivered an actual income of 3.52p per share – an 11.9% increase versus the previous year. Meanwhile, the Quilter Investors Monthly Income & Growth Portfolio delivered an income of 3.41p per share, representing a 14.6% increase compared with the prior fiscal year to 30 April 2021.”

graph showing monthly income distributions in 2021-2022 fiscal year

1All income figures quoted in pence per share, based on the U Income share class of the Quilters Investors Monthly Income and the Quilters Investors Monthly Income and Growth portfolios.

What were the key drivers of this outperformance?

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CJ Cowan, Portfolio Manager

“Equity dividends continued to trend higher through the portfolios’ 2021-22 fiscal year as the post-pandemic economic recovery continued. This was the biggest driver of the income growth over the period.

“Although we projected an increase in dividends over the year, the recovery was stronger than anticipated. Growth in equity dividends was broad-based, with many companies recovering from the cuts made during the pandemic. On top of this, dividend growth was especially robust among energy, materials and financial stocks.

“Steeply rising commodity prices were the chief driver of gains for the miners, with many delivering record pay-outs while, in the latter stages of the year, energy companies also saw notable increases. In addition, financials also saw reasonable growth as bank dividends continued to recover.

“From a regional perspective, the strength of the dividend growth in these sectors was especially beneficial to the UK given the market’s high weightings to such companies.

“Income from the fixed-income portfolio was, in aggregate, a little weaker over the period. We had anticipated some of this decline, especially from funds such as the Allianz Strategic Bond Fund.

“It’s worth remembering that, while equity funds have a relatively simple method for calculating distributions – they pay out the dividends they receive over the period – the calculation method for fixed-income ETFs and open-ended funds is more nuanced and varies between providers. Typically, it is based on the yield of the bonds when they were purchased by the fund, rather than their current yield. This means it can take some time, often years, before higher bond yields feed into higher distributions for fixed-income funds.

“One bright spot within fixed income was our alternative fixed-income holdings, which fared better than we were expecting. The default rates on the underlying loans held by these trusts remained very low, which supported the level of income they paid. The Fair Oaks Income trust was the standout performer on a year on year basis, but that was largely down to a change in payment cycles in the previous financial year.

“Meanwhile, income from our alternatives holdings were, on the whole, in line with our expectations for the year and continued to provide relatively steady income streams.

“The portfolios also benefitted from currency movements over the period. The US dollar has made strong gains against sterling so far in 2022, boosting the income received from a number of holdings within the portfolios versus what we had modelled at the start of the financial year."

Did the portfolio adjustments you made over the period help or hinder the portfolios’ income generation?

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Helen Bradshaw, Portfolio Manager

“The compositional changes we made over the fiscal year added to the income delivered by both portfolios. While we account for a number of ‘what if?’ scenarios when making our forecasts (which helps inform the upper and lower bounds of our forecast range), the portfolios retain the necessary dynamism to respond to changing market conditions.

“When we look at the asset mix of the portfolios now, versus the beginning of the last financial year, our weighting to UK equities as a proportion of our overall equity exposure has increased, as too has the weighting to higher-yielding large-cap companies within the UK.

“In addition, we opportunistically increased our exposure to US high-yield bonds and the Hipgnosis Song Fund during the period; both of which added to income levels over the course of the year.

“Meanwhile, the timing of some manager changes also added to the income streams. One example would be the addition of the JO Hambro UK Dynamic Fund to the portfolios. The timing of this purchase was fortuitous from an income perspective; it allowed the portfolios to capture additional ‘one-off’ income as the new holding offered a different distribution cycle to the holding it replaced.”

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Helen Bradshaw

Portfolio Manager

CJ Cowan

Portfolio Manager