Model income portfolios hold steady
The six income portfolios are divided into three categories to reflect investors' initial income requirements as well as their risk profiles.
For investors who need their capital to generate a high income as quickly as possible, we have created two immediate income portfolios which currently yield over 4% net of tax, while the balanced and growing income portfolios yield between 3 and 3.9% net.
All of the portfolios are expected to produce an increasing income and some capital growth. However, the immediate income portfolios are designed more with capital preservation in mind, while the growing income portfolios provide greater potential for capital growth but may be more volatile. The balanced income portfolios are intended as a middle way.
Interactive Investor clients can purchase these and our other portfolios as single investments at a reduced price. They also receive targeted email alerts detailing any changes to a Model Portfolio they have an interest in.
Click here to find out how our model growth portfolios have performed during the four years since their inception.
Click here for an overview of how all our model portfolios have fared over the last four years.
Golf: Immediate income
1% loss over one year, 42.3% gain over four years, historic yield: 4.69%
Although three of its holdings produced positive returns, these were offset by three holdings that fell in value.
The portfolio's best performer by total return during 2015 was Henderson UK Property. The UK commercial property market remained buoyant last year and this fund benefited from its focus on South-East locations.
Schroder Income Maximiser's equity portfolio is run on an unconstrained and contrarian basis and while this approach has generally paid off over the longer term its current exposure to the oil and energy sector has hampered recent performance.
Temple Bar is also run on a contrarian basis. Although it has delivered a growing income, as a result of its lack of overall progress since the inception of the portfolio, we have decided to switch out of this trust and replace it with City of London (CTY) instead.
This investment trust has not only increased its income payments for nearly 50 years, but has also achieved solid capital performance as a result of its manager's conservative approach of maintaining a portfolio of mainly blue chip, UK-listed companies.
Hotel: Balanced income
2.1% gain over one year, 45.6% over four years, historic yield: 3.78%
Hotel made only modest progress during 2015. Although solid returns were produced by its UK and global equity income fund holdings, it was held back by the losses incurred primarily on its holding in Temple Bar investment trust and, to a lesser extent, on its two bond fund holdings.
As a result, we have decided to make two switches out of both Temple Bar and Fidelity Strategic Bond fund.
Although Temple Bar continued to deliver a growing income in 2015, its manager's contrarian investment strategy has resulted in a lack of overall progress since the inception of the portfolio. We are therefore replacing it with City of London.
With the prospect of rising interest rates getting closer, we have also decided to reduce the portfolio's bond exposure, bringing in Premier Multi Asset Monthly Income as a replacement.
Although this fund will also include an element of fixed income, we believe its highly diversified approach provides greater scope for future growth of income and capital.
India: Growing income
6.5% gain over one year, 66% over four years, historic yield: 3.06%
India was our best-performing medium risk income portfolio during 2015 and also since inception. Its composition has remained steady with four of the seven original holdings still included.
During 2015, the strongest contributor was Bankers investment trust (BNKR). Bankers is a global trust and although it has a relatively low yield, part of its objective - which we particularly like - is its aim of producing regular dividend growth, in excess of the increase of the retail prices index.
At the beginning of 2015, Bankers had achieved its 48th year of consecutive dividend increases. One of the features that boosted its performance last year was its higher-than-average exposure to Japan, which makes up 11% of its portfolio.
One change made to the portfolio in April 2015 was the inclusion of Fidelity Strategic Bond, which was brought in to replace another bond fund - M&G Optimal Income - due to the latter's low yield.
However, we have now decided to reduce our exposure to bonds further by switching from the Fidelity fund to Premier Multi Asset Monthly Income.
Although this fund's multi asset approach will mean that there is still some fixed income exposure in the portfolio, we believe it will provide greater scope for future growth of income and capital while still remaining a reasonably low risk core holding.
Juliet: Immediate income
4.8% gain over one year, 56.3% over four years, historic yield: 4.01%
Only one of the six holdings produced a negative return in 2015, enabling the Juliet portfolio to perform reasonably well last year.
The detractor was Schroder Income Maximiser. The fund invests in a portfolio of ordinary equity income holdings and uses derivatives, selling options on the stock in the portfolio, to generate extra income.
The latter strategy enabled it to deliver its 7% income target for the 10th year running last year. However, its capital performance was held back by its managers' contrarian stance and exposure to oil and energy.
Nevertheless we expect its performance will recover and in the meantime it is delivering a good income for investors.
The best performing holdings in the portfolio last year were Rathbone Income and Invesco Perpetual Income. The latter has continued to produce steady returns under the management of Mark Barnett, since the departure of Neil Woodford in 2014.
Barnett, who had previously been in Woodford's shadow, has moulded the fund to reflect his own investment style and made it more diversified. However, like his predecessor, he continues to invest in well-managed companies which are delivering sustainable dividend growth.
Kilo: Balanced income
6.9% gain over one year, 67.8% over four years, historic yield: 3.89%
Kilo produced a good return in 2015, more than half of which came from its healthy yield of 3.89%. All but two of its holdings produced a positive return.
The star performer was PFS Chelverton UK Equity Income, a fund which was included in the portfolio at the beginning of the year, returning nearly 17%.
It has benefited from its bias towards mid-cap companies, which were the best performers in the UK market last year. Its managers believe that their focus on income-paying mid and small-cap companies, which they describe as "dull but worthy", has been particularly worthwhile.
The holding that lost the most ground was Temple Bar, which we had also held in three other income portfolios since inception.
As we point out elsewhere, the investment trust continued to deliver a growing income in 2015, but its manager's contrarian investment strategy has resulted in a lack of meaningful progress since the inception of the portfolio.
We are therefore replacing it it with Lowland (LWI), another trust with a good record of rising income payments. Lowland invests in medium and small as well as larger companies. Investors should be aware that its share price discount/premium to net asset value can sometimes be rather volatile.
Lima: Growing income
7.2% gain over one year, 79.4% over three years, historic yield: 3.32%
The Lima portfolio was our best performing income portfolio in 2015 and our best performing model portfolio overall since they were set up four years ago. It produced a good return in 2015 despite two of its holdings producing negative returns over the year.
Its top performer was PFS Chelverton UK Equity Income, which benefited from its bias towards the shares of mid-cap companies, which were the best performers on the UK stockmarket last year.
The two holdings which detracted from its performance last year were investment trusts Schroder Oriental Income (SOI) and Temple Bar.
The Schroder trust has suffered from the general malaise affecting stockmarkets in the region. However, we have confidence in its highly experienced investment manager Matthew Dobbs to get it back on course as Asian markets recover.
In the case of Temple Bar, however, we have decided that it is time to change to a more reliable performer and have switched to Lowland which, like Temple Bar, has a long history of increasing dividends.
It invests in medium and small as well as larger companies. Investors should be aware that its share price discount/premium to net asset value can sometimes be rather volatile over the short term.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
OEICs and Unit Trusts
OEICs and Unit Trusts
|Name||1 Year (%)||3 Years (%)||5 Years (%)||Discount||NAV|
|Baillie Gifford Shin Nippon PLC||55.01||191.75||363.37||11.07||780.12||Buy|
|Baillie Gifford Japan Trust PLC||44.07||120.75||306.49||6.98||760.86||Buy|
|Edinburgh Worldwide IT PLC||48.00||81.30||151.62||-2.39||728.12||Buy|
|Monks Investment Trust PLC||40.15||101.76||158.56||3.17||744.39||Buy|
|Pacific Horizon IT PLC||49.09||68.49||103.40||-8.46||336.33||Buy|
|Scottish American Investment Company PLC||18.25||70.09||99.32||4.95||346.84||Buy|
|Scottish Mortgage Investment Trust PLC||43.13||87.77||218.11||2.07||434.89||Buy|