In an unpredictable world, flexibility is vital. Low yields have become the norm for many investors, yet with the prospect of rising interest rates on the horizon, it can prove difficult to determine the correct allocation for an investment portfolio or when alterations should be made.
Maintaining a well-diversified portfolio is often one of investors’ biggest challenges. Different asset classes, such as shares and bonds, will perform well at different times. Getting the balance right and achieving an appropriate asset mix is therefore important as it helps reduce risk.
It is similar when it comes to diversifying sources of income, as the distributions made by different investments and asset classes will fluctuate over time.
Over time, investors with diversified portfolios carry less risk and usually see a more consistent and stable income stream. To manage risk, a balanced portfolio containing shares and bonds, as well as alternative assets such as currencies and commodities, could be one solution.
The Rathbone Strategic Income Fund, due to launch on 1 October, will aim to do exactly that, providing diversification through one investment. The ongoing decision making is left to an experienced research team, with the fund being managed by David Coombs and Rathbone’s wider team of investment analysts.
What will the fund aim to achieve?
This new fund will have a total return target of inflation (as measured by the Consumer Price Index) plus 3-5%. It will focus on delivering a growing and sustainable dividend, in addition to capital growth, rather than simply targeting a high, and potentially unsustainable, yield. The minimum target yield is 3%, but will be variable and not guaranteed, and the fund will make monthly income payments.
The fund will also seek to limit volatility to two-thirds of that incurred by global equities (as measured by the MSCI World index).
While the managers will do their best to achieve their aims, investors need to be mindful of the risks; especially that they could get back less than they invested.
A broad universe
The fund will be divided into three buckets: equity, liquidity, and diversifiers. The equity bucket will include shares and other assets deemed to carry a similar level of risk. Liquidity assets are those the team believe demonstrate low volatility. They are traditionally viewed as near-cash positions which can be sold relatively quickly. Diversifiers offer diversification potential, demonstrated by the limited characteristics they share with equities.
The team have the ability to hold a zero weighting in any of these buckets, although the typical allocations are outlined below.
|Equity||40 to 85%||
|Liquidity||10 to 40%||
|Diversifiers||5 to 20%||
The fund will largely be directly invested, though the team can invest in other funds to access more specialist, and higher-risk, asset classes such as Asia, emerging markets and Japanese equities, property, and smaller companies. The fund can also make use of derivatives, which increases risk.
How will the fund be positioned at launch?
At launch, the portfolio is likely to be mostly invested in shares and bonds, in which the investment team currently find the greatest value compared with other income-producing assets. The equity portion will be biased towards quality companies, believed to provide more resilience in an uncertain economic environment as well as the potential for growing dividends. Geographically there will be a bias towards the US as the team believe the country and its consumers are in good shape, helped by lower commodity prices. Potential holdings include Visa, Google and Bank United, a bank and commercial lender.
The bond component will predominantly focus on short-dated bonds, which tend to face lower sensitivity to interest rate rises. For instance, there is a greater probability that interest rates will rise, and negatively affect a bond's price, within a longer time period than within a shorter period.
Our view on this fund
We believe this fund could provide an overall long-term portfolio solution or diversification to an existing portfolio. It will be overseen by a team of professionals, with the support of Rathbone’s experienced and resourced team of portfolio managers and analysts. In our view, the construction of the portfolio and the team’s investment approach appears sensible, with the aim of growing both income and capital over the long term.
The team manage a number of other multi-asset portfolios where they have built respectable track records. That said, until now they have employed a multi-manager, or ‘fund of funds’, approach in managing their existing funds. As such their success in running a portfolio using a directly-invested approach remains unknown.
In addition, their track record is limited compared with our favoured managers running multi-asset portfolios. For these reasons we will not be including the fund on the Wealth 150 list of our favourite funds across the major sectors at the present time.
Investors wishing to invest at the fixed £1 launch price can place their instruction online or over the telephone with our dealers by 5pm on 29 September.