Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
The Bank of England recently cut interest rates for the first time since March 2020 and there is a good chance that there will be more reductions to come. If the base rate moves appreciably lower than its current 5%, then income seekers who have been reluctant to move out of cash may have to look for more sustainable sources of yield.
A good example is Ninety One Diversified Income, which is a conservatively managed multi-asset fund with a target return of 4% per annum. Please note this return is not guaranteed. The management team has a long track record of running the strategy and this has helped to earn it a place in Fidelity’s Select 50 list of handpicked funds.
Income-based objective
The aim is to provide income with the opportunity for capital growth over holding periods of at least 5 years. It operates in the mixed Investment 0-35% shares sector and holds different asset classes to try to limit the volatility to less than 50% of that of the UK stock market as measured by the FTSE All Share index.
Managers John Stopford and Jason Borbora-Sheen say that the performance can be compared to a return of 4% each year. They believe that this offers a reasonable reference point based on current market conditions and the main types of assets available for investment.1
What are the manager’s latest views?
Writing at the end of the first quarter, they said that meaningful disinflation was taking place and that the risks to economic growth were to the downside, given the speed and magnitude of the hiking cycles in the developed world.
“While uncertainty is likely to continue, particularly around the timing and magnitude of rate cuts, there are pockets of opportunity. There are assets that are attractively valued, offer good income sources, with less uncertainty and are potentially more defensive in an economic downturn.”2
The fund’s positioning is consistent with this more cautious near-term outlook, with the aim being to manage the potential downside, while looking for resilient yielding opportunities to generate a defensive total return. Options play a key role, with the managers using them to hedge some of the risks without missing out on the possible market upside.
Low-risk portfolio
Their favourite area is government bonds, which make up 55.7% of the assets, with the holdings spread across countries such as New Zealand, the US, Europe and the UK. It is followed by emerging market local currency debt at 20%, as the managers think that the central banks are closer to cutting interest rates than their developed market counterparts.3
The fixed income holdings are mostly investment grade to minimise the credit risk and virtually all of the currency exposure (95.4%) is hedged back to Sterling. The net equity weighting is just 14%.4
Sustainable source of income
A low risk fund like this will typically generate modest single digit annual returns and over the last decade there have only been two years where this wasn’t the case. In 2020 it made a gain of just 0.46% and in 2022 a loss of 6.63% based on the trailing 12-months to the end of June.5
It is the income that really sells the fund as the distribution yield is currently an attractive 4.59% that would be tax-free if held in an ISA or SIPP. The money is paid every month, although the amounts vary slightly as you would expect.6
How do the costs stack up?
The latest ongoing charges figure is 0.69%, which is fairly typical for a low-risk fund with significant bond holdings.
More on Ninety One Diversified Income Fund
Source:
1,3,4 Ninety One Diversified Income July 2024 factsheet
2 Ninety One Diversified Income Strategy Commentary, 31 March 2024
5,6 Fidelity International, 30 June 2024
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. This fund invests in overseas markets and so the value of investments can be affected by changes in currency exchange rates. This fund also invests in emerging markets which can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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