The Perpetual attraction of income

With many analysts expecting the worst to be over in terms of dividend cuts, 2010 is being touted as a better year for income. But, with interest rates still at paltry levels, a fund delivering a strong income stream alongside capital growth remains an enticing investment - especially for older investors.

So step up, Perpetual Income & Growth Fund. Managed by Mark Barnett, a senior member of Invesco Perpetual's UK team based in Henley, the fund boasts one of the highest dividend covers in the Income Growth sector, with a current yield of 4.3 per cent, and revenue reserves equivalent to 1.4 years of dividends.

Mr Barnett took over the reigns of Perpetual Income & Growth from Neil Woodford in July 1999, and has done an exceptional job since then. Over the last 10 years, the fund's net asset value (NAV) is up by 119 per cent compared with a 17 per cent rise for the FTSE All-Share.

Mr Barnett's investment process sees him combine a topdown analysis with bottom-up stock selection. His starting point is to take a view on the direction of economic factors, and like Mr Woodford, he is negative on the outlook for the UK economy given the size of consumer debt and government debt. Consequently, Mr Barnett stuck to defensive holdings through 2009, and his cautious positioning saw the fund lag its benchmark, as well as the performance of its Income Growth peers over the course of last year.

The fund's discount has mirrored its relative performance, and after trading on a premium for much of the first half of 2009, the fund has been de-rated over the last few months and is currently trading on a discount of around 9 per cent.

While the fund's exposure to cyclical sectors has increased recently, analysts at WINS investment trusts say Mr Barnett is sticking to his defensive stance, especially given the attractive price to earnings ratios (PEs) of some of the largest defensive names such as AstraZeneca, British American Tobacco and Associated British Foods. WINS analysts point out that the trailing PE for a basket of such defensive names is currently 20 per cent to 30 per cent lower than the PE for the FTSE 100.

That said, the majority of stocks in Perpetual Income & Growth's portfolio generate earnings in markets outside the UK - the majority coming from the US.

Given that Mr Barnett and Mr Woodford both share an unconstrained investment process, and have similar macro views, it is hardly surprising that Mr Barnett estimates a 60 per cent to 70 per cent commonality in stock holdings between Perpetual Income & Growth and Edinburgh Investment Trust (IT).

However, WINS analysts point out that given Mr Woodford's more defensive stance, Perpetual Income & Growth has outperformed Edinburgh IT over the last year by 4 per cent. They also favour Mr Barnett's fund because, unlike Edinburgh IT, it is not saddled with expensive long-term debt.

Key fund data:

Source: Thomson Datastream, Morningstar*

Notes: Performance figures as at 4 January 2010

Top 10 holdings as at 30 November 2009

Asset Allocation