Inside the VT Chelsea Managed Monthly Income fund - reliable monthly income

While long-term investors can ride out a storm or two in financial markets, those who rely on income from their investments need greater predictability. Relatively few people have the financial flexibility to see their income fluctuate significantly from month to month. Diversification is always important, but it is particularly important for income investors.

This is the understanding that runs through our popular VT Chelsea Managed Monthly Income fund. Our aim is to provide a regular monthly income for 11 months of the year, plus a ‘bonus’ payout once a year with anything that is left. Creating this level of predictability requires a level of nuanced diversification that goes beyond blending a few bond and equity funds together and hoping for the best.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

Our view on equities

In the equity portfolio, currently around 33% of the overall fund, we are diversified across different regions, holding European income, Asian income and UK income, alongside a range of North American holdings. This has proved vitally important in the first few months of 2025, when US stock markets have been on a rollercoaster, but other areas have shown more stability. But it is also important in the longer term. An Asian income fund will bring access to companies such as TSMC, the most valuable semiconductor company, or Samsung, a real contrast to the boring, but dependable companies that might be found in a UK equity income fund.

We are also diversified across market cap. The recent tough period for the sector has left some smaller companies on both attractive valuations and high yields. The FTSE Small Cap index now has a 4.2% yield. The inclusion of smaller companies could also be a valuable source of growth should investors change their view on the asset class, but in the meantime, with healthy dividend yields, we are paid to wait

Within our equity holdings, we want to see dividend growth as well as a high and sustainable dividend. As a result, we specifically target certain fund managers who prioritise growth in dividends over time: Stuart Rhodes on the M&G Global Dividend fund, or Richard Sennitt on the Schroder Asian Income fund would be examples of this type of approach. Both managers have been running these funds for a long time, and have built a consistent track record of increasing payouts.

Our view on fixed income

Bonds have become a good option for income investors since the turn in the interest rate cycle. Even though interest rates are now falling, few believe they will go back to pre-2022 levels and in the meantime, investors can pick up an income of 4-5% on a government bond, and a few percent higher for a corporate bond, depending on its risk levels.

We believe having a blend of fixed income is crucial. Different types of bonds are exposed to different risk factors. For example, a short-dated government bond may have less interest rate risk. High yield bonds tend to be closely tied to the fortunes of individual companies and the level of default expectations in the market. All bonds are tied to inflation expectations, but it is more important for some than others.

This was evident in 2022 when the interest rate cycle turned. Longer-dated government bonds had a torrid time, and inflation-linked bonds were particularly hard hit. Nevertheless, there were parts of the market that proved better at preserving capital. For the most part, the income stream was not affected, but it certainly showed the necessity of holding a range of fixed income options.

With this in mind, we have a nice mix of government, investment grade and high yield bonds with a little bit of emerging market debt. We tend to use government bond ETFs because they are cheaper, and it is difficult for an active manager to add value in this part of the market. We balance that with a number of flexible strategic bond funds such as Nomura Global Dynamic Bond and Artemis Short-Duration Strategic Bond. As it stands, the fixed income part of our portfolio is 28%.

How we leverage alternatives

The other significant segment of the portfolio is alternatives, currently 21%. This is full of unloved opportunities and we are finding a range of options that meet our criteria, including infrastructure, airplane leasing, renewables, and different types of REITs.

It is an eclectic mix. We have a company that lends to biotech companies based on royalties. We have around 15% or so in renewable energy infrastructure options. We have investment trusts focused on GP surgeries, alongside ‘big box’ warehousing REITs. We also have the Chrysalis investment trust, which doesn’t have a yield, but does bring exposure to high-growth, unlisted companies, such as Klarna and Starling Bank.

Some of these trusts, particularly among renewable energy infrastructure, are on double-digit yields, discounts to NAV and the income appears sound. There are signs of growing acquisition activity in the sector, which might see some trusts acquired by others in order to realise value. Again, the income is so high for some of these investments that we are paid to hold them.

While we always keep a balance of investments in the portfolio, we will move the portfolio around flexibly where we see opportunities. More recently, that has meant selling down some high yield, but also out of our gold position. Instead, we have been topping up on some of the renewable energy infrastructure trusts, which are very lowly valued.

The fund has a yield of 5.9% at the moment. That yield is stable, and well-diversified, and our underlying investments should have capital growth potential as well. We believe this is exactly what investors need from their income fund.

The VT Chelsea Monthly Income fund is ranked 2nd out of 124 funds in the IA Mixed Investment 20-60% Shares since launch in June 2017. It is the top performing income funds in the sector over that period, delivering a return of more than 32% higher than the sector average*.

*Source: FE fundsinfo, total return in pounds sterling, 5 June 2017 to 22 May 2025

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.