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Update On Our Model Income Portfolio

Posted by: Brian Dennehy

The demand for income will grow for decades to come driven by ageing populations in wealthier economies.  This demand will push higher yielding stocks higher than other parts of the stock market, so even if you don’t need income now, you should buy into this strategy anyway, reinvesting the income. 
With our model income portfolio we are looking to achieve growing income over many years, perhaps through a long retirement.  There is one big difference to the growth portfolio...
...RISK. If you want to achieve long term growing income you must adjust your mental approach.  You must focus on the reliable income rather tha the ups and downs of the capital value.
Think of the income portfolio like your heart pumping out blood - the heart continually changes shape as it pumps out a steady stream of blood. Similarly, the capital value of your income portfolio will also vary from day to day, but there will be a steady flow of income, growing income.
Average payout growth for this portfolio in 2016 (+1.85%) was helped by strong growth from Asian and UK funds, with Emerging Income and Global falling.  Sterling weakness has been helpful for managers investing in companies with overseas earnings.    
Schroder Income has a very good track record, growing payouts in 8 of the last 10 years, including 2016 (+6%).  The fund seeks out companies that are not correctly valued by investors (under-valued without good reason - not just cheap), and doesn’t try to be too clever by timing currency strength or weakness.  This is an approach that has done well.  
JOHCM UK Equity Income has also managed to grow its payouts in 8 of the last 10 years.  Payout growth for 2016 (+8.6%) was helped by sterling devaluation.  This fund also has a Value tilt and with more than most in small and medium sized companies.  
Uncertainty around Brexit means the managers are cautious on 2017, estimating low-middle digit growth in the dividend income - but still growing.
Newton Asian Income had a bumpy few years along with the sector as a whole (2011-15) but still grew its payout in 2016 (+5.7%).  The fund’s lower yield target means it can avoid companies with unsustainable dividends.  We’re pleased to see the fund return to growing its payout, which it has managed in 6 out of the last 10 years.  
One to keep an eye on is Liontrust Asian Income, which has a shorter (but good) track record, growing payouts in 3 of 4 years.  The fund sees earnings growing at around 8% per annum, so prospects for payout growth should be good.  
Newton Emerging Income hasn’t managed to increase payouts again, so we are replacing this with JPM Emerging Markets Income.  Though the payout was down in 2016 (-5.39%), this is less than its peers.  Plus, the fund has managed to grow payouts in 3 of 4 years, which is the key consideration for this portfolio.  
Given the investing universe – emerging markets make up 85% of the world’s population – we expect payouts to increase in the coming years as emerging economies diversify and strengthen. 
Artemis Global Income failed to grow its payout in 2016 (-5.66%) as was expected, but it has grown its payout in 3 of the last 5 years. The manager’s positioning wasn’t quite right at the start of the year when large growth companies and oil & gas dominated returns.  
However, Value investing has started to outperform recently and the fund is well positioned to exploit this trend.  
We are keeping an eye on this one but are cautiously optimistic for the payout in 2017.
Table 1: Income Growth (year to 31 December 2016)
Fund Yield (%)

2016 Income

Growth (%)

Artemis - Global Income 2.85 -5.66
JOHCM - UK Equity Income 4.30 8.60
JPM - Emerging Markets Income 4.59 -5.39
Newton - Asian Income 4.17 5.70
Schroder - Income 3.47 6.00


Topic: Generating income


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