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Improving the resilience of your income portfolio

UK: Suitable for retail and professional clients

Helen Bradshaw

Portfolio Manager

With coronavirus cases now experiencing hotspots across Europe, the US and the UK, and local lockdowns becoming the norm, Helen Bradshaw, portfolio manager at Quilter Investors, looks at how income investors can improve the resilience of their portfolios in this unpredictable environment.

Improving-the-resilence.jpgWhile many economies have begun the reopening process, the number of coronavirus cases have continued to climb in the likes of Argentina and India, while the US and Europe has seen a surge in cases suggesting a second wave of the virus may be forthcoming. As we head into the cooler months of autumn and winter and the traditional flu season there remains uncertainty as to whether the current measures are sufficient or if stricter rules and wider lockdowns may be needed.

For investors banking on a swift economic recovery, this would be unwelcome news, and for those seeking income, further lockdowns or a pause on reopening measures could prolong the current investment pain.

Many income investors had hoped for higher dividend payments in the second half of the year, however, the trajectory of a recovery in corporate dividends is highly dependent on the speed and progress of the economic recovery.

To see the impact the coronavirus has had on company dividends we only have to look at the UK market. The iShares Core FTSE 100 exchange-traded fund (ETF), a good representation of the income opportunity offered by the largest 100 companies listed in the UK, saw its quarterly dividend per share fall by 60%1 in June compared to the same period in 2019.

However, while the consequences of the coronavirus lockdown has been a challenging period for income investors, with many companies cutting or suspending dividend payments and traditional income paying sectors struggling, not all hope is lost.

The dividend challenge in the UK and Europe has been well documented, and with bond yields falling from already low levels, income investors may feel like there is nowhere to turn. However, there are ways in which investors can seek to add more resilience to their income streams, which may be a prudent approach in the event of economic lockdowns returning.

1. Utilise investment trusts

The collapse in dividends has been painful for equity income funds as they look at how they can fill the gap left by companies suspending or cutting their payouts. However, for investment trusts the situation is slightly different. Their fund structure allows them to use revenue reserves to support dividends if there is a shortfall of income. This is a helpful feature in leaner years and should mean their dividends are more resilient than their open-ended peers.

Example held in the Monthly Income Portfolio: City of London

This trust, which invests in UK shares, is somewhat of a dividend hero for investors, particularly given the current circumstances. Despite all the headlines of dividend cuts and suspensions, City of London just raised its dividend for the 54th consecutive year and is aiming for the same next year too. This is an example of where the investment trust fund structure benefits an end investor, allowing it to use revenue reserves to grow its income over the long-term.

2. Widen your net

In recent years the range of ‘alternative’ investment options available to investors has expanded in size, depth and breadth and now encompasses a wide range of asset classes from specialist property to infrastructure, renewable energy and even music royalties. Not only do alternatives typically have a lower correlation to more mainstream assets, but there are a number that can provide an attractive level of income, and one that is less sensitive to the economic backdrop.

Example held in the Monthly Income and Monthly Income and Growth Portfolios: Hipgnosis Songs Fund

Hipgnosis is a unique alternative investment in the fact it buys music catalogues and investors receive an income from the royalties generated from these songs. With a fairly eclectic mix of music in the portfolio, including the Kaiser Chiefs and Mark Ronson, income from this investment trust can be a good diversifier within a portfolio given the underlying drivers are less correlated to the economic cycle.

3. Diversification

The coronavirus crisis has highlighted once again the importance of diversification. Not only can this help protect your investment returns when markets are volatile but ensuring your income is diversified by both geography and sector can also help increase its resilience in times of stress. For example, the UK equity market has been an income seeker’s friend over the long-term, but those dividends are concentrated to just a handful of companies. Even prior to this crisis, at the end of 2019, just 10 companies accounted for 50% of the FTSE All-Share’s yield2. There are opportunities elsewhere in the world that can help support your dividend stream and lead you away from such concentration risk.

Example held in the Monthly Income and Monthly Income and Growth Portfolios: Schroder Asian Income Fund

This fund focuses on Asia ex-Japan, so is in both the developed market and emerging market spheres. Asian companies tend to pay out a lower percentage of their earnings than elsewhere while also having less debt. Both these factors should help to make their dividends more sustainable in a world where dividend cuts are becoming more and more common.

Seeking out and taking advantage of opportunities wherever they may arise can help diversify and add resilience to income streams, which could prove beneficial in a more challenging environment.


Important information

Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.

This communication is issued by Quilter Investors Limited (“Quilter Investors”), Senator House, 85 Queen Victoria Street, London, England, EC4V 4AB. Quilter Investors is registered in England and Wales (number: 04227837) and is authorised and regulated by the Financial Conduct Authority (FRN: 208543).

Quilter Investors Monthly Income Portfolio and Quilter Investors Monthly Income and Growth Portfolio (“the Funds”) are sub-funds of Quilter Investors Multi-Asset OEIC, an investment company with variable capital incorporated in England and Wales.

Quilter Investors Multi-Asset OEIC is authorised by the Financial Conduct Authority as a non-UCITS retail scheme and can be distributed to the public in the United Kingdom.

Quilter Investors uses all reasonable skill and care in compiling the information in this communication which is accurate only on the date of this communication. You should not rely upon the information in this communication in making investment decisions. Nothing in this communication constitutes advice or personal recommendation. An investor should read the Key Investor Information Document(s) (“KIID”) before investing in any sub-fund of Quilter Investors Multi-Asset OEIC. The KIID and the prospectus can be obtained from in English.

The Funds invest principally in other collective investment schemes. Your attention is drawn to the stated investment policy which is set out in the prospectus.


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