Investors in the VT Chelsea Managed Monthly Income fund have received a bumper special distribution this month, worth 3.65 times the fund’s usual monthly payment.
The payment marks the eighth consecutive year in which the fund has paid a special distribution to investors, adding to its track record of delivering regular income to investors since its launch in June 2017.
The fund was established with the aim of providing investors with a reliable, sustainable and growing stream of income alongside the potential for long-term capital growth. More than nine years on, an investor who put £1 into the fund at launch has received more than 46p per unit in income, while the capital value of the income share class has risen from £1 to approximately £1.17.
The latest special distribution therefore provides another significant boost to investors’ income, while highlighting the fund’s approach of combining regular monthly payments with additional distributions when available.
This has been achieved despite an exceptionally challenging period for investors, including the Covid pandemic, the market volatility of 2022, high inflation and interest rates, renewed trade tensions and tariffs, and more recently the ongoing conflict in Iran.
Our approach
We’ve previously used the jigsaw analogy to explain how we build our income portfolio – all the pieces have to be in place for the picture to come together. Assets will yield differently at different times, so we will strategically combine diverse sources of income to target a high and resilient yield, year in, year out.
Flexibility has been key to our approach, particularly given the differing challenges faced by markets in the past nine years. Our range has the ability to invest both globally and in different asset classes. The portfolio is made up of income from lots of different sources to avoid being reliant on one area. A good example would be the second quarter of 2020 (the height of the Covid crisis) when UK dividends were cut by 57%, resulting in payouts to shareholders falling by £22 billion on a year-on-year basis. We have exposure to a number of income streams within our portfolios, meaning that while other income funds cut their dividends, we did not.
The fund has also made use of specialist investment trusts, an area where we have significantly increased our experience in the past decade. This covers the likes of renewable energy, supermarkets, infrastructure, social housing and secured debt. These have been a great boost to our returns while also offering high but stable dividend returns.
The fund is more than just an income portfolio, it has also delivered 81.5% to investors since launch, almost double the return of the average fund in the IA Mixed Investment 20-60% Shares sector (42.6%)*. Returns have also been consistent, with the fund producing a positive return in seven of the past nine calendar years. Its biggest loss came in 2022 (4%), and compares favourably when you consider global equities lost almost 8% that year**.
Positioning for income and capital growth
We have recently been looking to reduce the duration of the bonds within the portfolio, given the increased global uncertainty around inflation and interest rates. Duration is simply a way of showing how sensitive a bond fund is to changes in interest rates – the longer the duration, the more sensitive it is to rates. For example, if a bond fund has a duration of 5 years, a 1% rise in interest rates would roughly mean a 5% fall in the fund’s value.
We sold our longer-duration government bond holdings at the start of the Middle East conflict and have subsequently focused on opportunities where we can generate attractive levels of income without taking excessive interest-rate risk.
A recent addition to the portfolio is Jupiter Monthly Income Bond, managed by Hilary Blandy. We have added the fund to three of our portfolios, with its income focus being a key attraction. The fund currently yields over 6% and invests across both investment-grade and high-yield bonds, but importantly has a short-duration focus. That approach provides greater resilience to further rises in yields, while still offering an attractive level of income. We believe this represents an appealing balance between income and interest-rate risk.
Alongside our bond holdings, we also have exposure to a range of global equities. These generally offer lower levels of income than bonds, but provide greater potential for long-term capital growth. Examples include M&G Global Dividend and IFSL Pinnacle Life Cycle Global Equity Income.
Within the UK allocation, we also hold the Man GLG UK Income fund, which currently yields approximately 4.1%. The fund invests at least 80% in UK companies of all sizes, while also having the flexibility to invest in continental European companies that derive a substantial proportion of their revenues from the UK. It can also selectively invest in corporate bonds, providing an additional source of flexibility that differentiates it from many of its peers.
Solid income environment gives us freedom to search for capital growth
With interest rates and bond yields still offering relatively attractive levels of income, we have greater flexibility to look for opportunities further up the risk spectrum. Rather than relying solely on bonds to generate returns, the current income environment allows us to allocate capital towards areas with greater potential for long-term growth.
Against this backdrop, we have added to our emerging-market exposure through funds such as Artemis SmartGARP Global Emerging Markets Equity. We have also added BlueBay Emerging Market Bond and topped up M&G Emerging Markets Bond. Both funds initially came under some pressure following the outbreak of the Middle East conflict, but have since recovered and moved back into positive territory.
Energy remains an area we are monitoring closely given the uncertainty surrounding the Middle East, and we continue to look for opportunities across the wider commodity space. We also retain a focus on specialist investment trusts, with Primary Health Properties PLC and BioPharma Credit providing good examples. These currently yield approximately 7.9% and 7.25% respectively, despite discounts across parts of the investment trust sector having narrowed***.
The past nine years have certainly tested investors, but we are proud that the fund has continued to deliver growing income for investors alongside strong capital growth. Overall, the strategy of sourcing income from a wide variety of different assets and markets continues to work well. We continue to find attractive opportunities across a broad range of markets allowing us to continue to deliver for our investors.
