Monthly Income fund celebrates fourth birthday with year-on-year top-quartile performance
LeggMason Investors' Monthly Income fund has reached its fourth birthday, producing top-quartile performance in every year of its existence.
The Standard & Poor's A-rated fund has posted growth of 20.16% over the three years to the 22 February, bid to bid, compared to an IMA UK Other Bond sector average of -8.03%, ranking it second out of 13 funds in the sector.
Chris White, manager of the £29m fund since launch, said it is diversified throughout a range of asset classes, including investment grade corporate bonds, high yield, equities, convertibles and at times preference shares.
White said: 'We allocate assets to where we think the best returns will come from. Normally, at least 60% of the fund is in investment grade corporate bonds.'
The corporate bond portion of the fund's assets is outsourced to sister company Western Asset Management's London office, also part of the LeggMason Inc parent group.
White said he meets his counterparts at Western on a monthly basis to discuss asset allocation and performance, although stock selection is left solely at Western's discretion and the group is free to hedge overseas bonds back into sterling to boost performance.
He said: 'Western is particularly strong in looking at corporate credit. It tends to run with a duration neutral strategy that takes one of the risks out and looks to add value through bottom-up stock selection, which can be controlled more than duration.'
This quarter has seen Western rotate out of the more defensive areas of the market such as utilities into cyclical stocks in sectors including mining, industrials and media.
Risk controls attached to the outsourcing agreement limit individual stock weightings dependent on their ratings.
Investments into AAA-rated corporates are limited to a maximum 5% per stock, which decreases in tandem with the rating.
The remainder of the fund is invested in an array of asset classes, which helps mitigate risk, characterised by the fund's below-average beta of 0.58, compared to the sector average of 0.84.
High yield exposure is limited to 10% of the fund and equity exposure tends to be below 5%.
White's equity exposure targets high dividend stocks with strong earnings streams and strong dividend cover.
He said: 'At the moment, we only have 3% of the fund in equities, which are predominantly in the water sector. They have stable revenues, decent dividend cover and the regulator has just announced these companies will potentially be allowed to keep more of their efficiency gains than in the past. They can be under researched too and have the potential to make 15%-20% capital growth.'
Convertible exposure constitutes 26% of the fund and includes such names as British Land, a stock White said is a typical target for the fund, offering a strong yield and the potential for capital growth. The anticipated market recovery will also benefit the asset class, he added.
Preference share exposure is currently under 3% of the fund, owing to illiquidity in the asset class, while gilt exposure is limited to just a couple of holdings because of inferior yields to corporates.
Our weekly heads-up for advisers
Former Neptune manager
27,000 transfers looked at
Consider risk capacity