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Multi asset: a good income alternative?

Multi-asset income funds can provide attractive income but risk duplicating other portfolio holdings
April 6, 2021

Multi-asset funds can work well as the core of a portfolio

Some of these continued to pay an attractive level of income last year despite dividend cuts

If you hold a multi-asset income fund make sure that its holdings don't overlap with other investments in your portfolio

There's a good reason why we rarely write about multi-asset funds. If you have a portfolio of direct share holdings and funds focused on single asset classes, holding multi-asset funds alongside these would cause a degree of overlap and confusion. Generally speaking, this approach risks making a self-managed portfolio messier and harder to control.

But as we explained in Make the most of the many uses of multi-asset (IC, 11.10.19), there can be exceptions. Multi-asset funds can work well as the core of a portfolio, while wealth preservation funds such as Personal Assets Trust (PNL) are one way to hold a variety of potential safe-haven assets via a single fund.

Another use of multi-asset relates to income. The pandemic has highlighted the risk of relying on one asset class for income, with dividend cuts tearing through the equity space and bonds facing their own issues, from default risk to the prospect of inflation returning. Multi-asset funds can offer a diversified source of yield – at least in theory.

They also provide a source of inspiration: investors who want to pick their own income investments could do worse than scour multi-asset income fund factsheets for an idea of funds, stocks and asset allocations that could deliver the goods. Assessing the most successful income funds can be useful on several fronts.

 

Which multi-asset funds have paid out the most?

If multi-asset income funds have proliferated in recent history, the level of risk they take and varying levels of success can lead to big differences in the sums they generate. Yet a handful held up notably well amid the carnage of 2020. As an illustration, our table shows how much some of the most successful funds would have paid out in 2020 if you had invested £10,000 in them at the start of November 2019.

 

Total dividends paid in 2020, based on a £10,000 lump sum invested in November 2019
FundAmount of dividends
Schroder Monthly Income£533.24
UBS Multi Asset Income£516.27
Liontrust Multi Asset Diversified Global Income£493.85
JOHCM Global Income Builder£480.43
Chelsea Managed Monthly Income£474.79
Premier Miton Multi-Asset Monthly Income£470.86
EdenTree Higher Income£455.40
Seneca Diversified Income£455.21
Premier Miton Cautious Monthly Income£452.70
ASI Diversified Income£447.34
Source: FE

 

In a difficult year for dividends, these funds came out ahead of a large swathe of UK equity income funds. They paid out more than 87 of the 109 funds included in the Investment Association and Association of Investment Companies UK Equity Income sectors. All the multi-asset funds listed in the table had historic yields of at least 4 per cent for that year. The name leading the list, Schroder Monthly Income (GB00B66FVB83), had a yield of 5.3 per cent for 2020.

These funds can be very different to each other, illustrating the many ways in which you can build an income. Some rely heavily on equities for yield, while others have a big focus on riskier bonds or diversify using assets such as property.

Schroder Monthly Income invests in other Schroders funds, with its asset allocation split roughly half and half between equities and bonds. At the end of February, UBS Multi-Asset Income (GB00B804TT93) had around a fifth of its assets in equities, with 9.4 per cent of assets in “listed alternatives” and a small allocation to real estate investment trusts (Reits). The balance of its assets were in a variety of bonds, from index-linked bonds to high yield and investment grade corporate debt. Liontrust Multi Asset Diversified Global Income (GB00BT9QBX16), similarly, has a wide spread of assets, from UK and overseas equities to bonds, alternatives and property. The chart shows, very roughly, the broad stated exposures the top four income paying funds had at the end of February. But note that their definitions of categories such as "alternatives" may vary.

 

 

This shows that while many rely heavily on traditional assets for income, other approaches can work. Stocks can provide a good level of income with dividends likely to recover somewhat in the wake of the pandemic, with the UK and Asian markets tending to look most attractive by yields available. Bond funds can be another option, especially strategic bond funds with a preference for the likes of high-yield debt.

But there are other high-yielding options, including property and infrastructure. As with any attempt at finding reliable safe-haven assets, the uncertainties facing investors may lead you to hold a variety of different income holdings. Multi-asset funds can be one way to do this in one place, provided you agree with the approach taken by their investment teams.

The funds also differ to each other in how they get exposure to assets. For example, while JOHCM Global Income Builder (IE00BFZWPC28) invests directly, Schroder Monthly Income and Liontrust Multi Asset Diversified Global Income buy into other funds. And while Schroders Monthly Income buys funds run by the same asset manager, Liontrust Multi Asset Diversified Global Income buys funds run by other providers such as Fidelity Global Enhanced Income (GB00BD1NLJ41) and Vanguard US Investment Grade Credit Index (IE00BDBBNM56).

Some of JOHCM Global Income Builder's biggest holdings may also point to interesting opportunities for investors. Its equity holdings include JPMorgan Chase (US:JPM), Microsoft (US:MSFT), Nestlé (SW:NESN) and Charles Schwab (US:SCHW), while the sectors it focuses most closely on for fixed income include communication services and financials.

 

Downsides and alternatives

If you opt for the simplicity of a multi-asset income fund, you need to be mindful of the risk of it overlapping with other holdings in your portfolio. Many multi-asset funds rely, at least to some extent, on equities, so if you add such a fund you might have more exposure to this asset class, and certain stocks or funds, than you realise. An equity component also leaves funds exposed to bouts of market volatility, although 2020 data suggests that some multi-asset funds have diversified well enough to survive the dividend drought.

Similarly, multi-asset funds that invest in other funds can rack up higher charges. That said, holding one multi-asset fund for income rather than several single-asset funds may prove to be cheaper.

Some equity income funds have managed to produce a strong income – despite last year’s events. Liontrust Income (GB00B8L7B355), which stands out from its peers thanks to some holdings in US stocks, would have produced an income of £783 in 2020 from a £10,000 investment made in November 2019. The fund recently had nearly 20 per cent of its assets in US stocks such as Microsoft and a 15 per cent allocation to the technology sector.

Income maximiser funds, meanwhile, such as Schroder Income Maximiser (GB00BDD2F083), and investment trusts including Law Debenture Corporation (LWDB) all generated more than £600 in the same analysis.