M&G Optimal Income, Fidelity Global Dividend and FP Foresight UK Infrastructure Income are three funds that income investors could consider holding to ensure their portfolios are well diversified, according to Fidelity’s Daniel Lane. 
Lane, a senior manager with Fidelity Personal Investing, said: “The search for income has pushed many investors up the risk scale over the past decade. However, as the longest bull market ever looks long in the tooth, it has never been more important to make sure these income sources are well diversified.”
Below, we take a closer look at the three funds that he believes create a diversified income stream.
M&G Optimal Income
Lane’s first pick is the £3.5bn M&G Optimal Income fund, which is headed up by FE fundinfo Alpha Manager Richard Woolnough and resides in the IA Sterling Strategic Bond sector. It aims to provide investors with total returns by taking exposure to the best income stream possible.
“In contrast to traditional income-orientated funds, the M&G portfolio is not compelled to invest in specific parts of the market where returns might be correlated with what’s happening in the economic cycle,” Lane added. “Unusually, this includes the freedom to invest up to 20 per cent of its holdings in the stock of individual companies if they look attractive relative to bonds.”
Performance of fund vs sector over 3yrs
Source: FE Analytics
Woolnough uses a three-step approach, which starts with an examination of the overall market landscape (to determine where growth opportunities lie) before looking at income source will best suit market conditions and then narrowing down the most suitable assets for the portfolio.
This is the most flexible strategy in M&G Investments’ range of fixed income funds and Woolnough will take lots of credit risk when interest rates and inflation are coming down but has the ability to go “very defensive” when interest rates are going up and bonds aren’t as attractive.
Over the past 10 years, the fund has outperformed its average peer with a total return of 76.27 per cent. An initial investment of £10,000 made at the start of this period would have yielding income payouts of £3,404.
M&G Optimal Income has an ongoing charges figure (OCF) of 0.84 per cent and is yielding 1.77 per cent.
Fidelity Global Dividend
Turning to equity income and Lane opts for the £1.3bn Fidelity Global Dividend fund, which is managed by Daniel Roberts with the aim of providing income and long-term capital growth. The manager seeks out good-quality companies on attractive valuations that can thrive and pay a well-covered dividend under a wide range of economic scenarios.
“With a global remit, Roberts has the freedom to roam around the world in search of reliable and growing dividends,” he said.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
“That’s a big advantage because sectors tend to cluster in certain geographies and be notably absent from others. Technology, for example, is not a feature of the European markets but is strong in the US and Asia. Asian investors do not have much exposure to healthcare.”
In addition to diversification, another key element of the fund is capital preservation. Roberts was formerly an accountant and this leads to numbers-focused approach with a focus on cash conversion, earnings persistence and balance sheet strength. “He follows Warren Buffett’s dictum that the first rule of investment is not to lose money,” Lane said.
The fund is currently top-quartile in the IA Global Equity Income sector over one, three and five years. An initial investment of £10,000 made at launch in January 2012 would have led to income of £3,540.
Fidelity Global Dividend has a 0.92 per cent OCF and is yielding 2.80 per cent.
FP Foresight UK Infrastructure Income
The final fund pick from Fidelity moves outside of the mainstream asset classes of equities and fixed income: FP Foresight UK Infrastructure Income. Managed by Mark Brennan with Nick Scullion and Carly Magee as deputies, the fund aims to generate income and preserve capital with potential for some capital growth.
According to Lane, the management team behind the fund claim it offers five distinct advantages for investors.
First is the portfolio’s ability to act as a ‘shock absorber’ for investors, as infrastructure acts as diversifier from stocks, bonds and other traditional alternatives. “Holding a range of income streams from uncorrelated sources means different parts of the portfolio can be firing at any one time, reducing investors’ reliance on one asset class in particular,” Lane said.
Performance of fund vs sector and index since launch
Source: FE Analytics
The second feature is the fact that many infrastructure investments offer protection against inflation as their underlying revenues are often directly linked to inflation, while the third is the high barriers to entry and long-term contracted revenue streams that lead to steady income streams.
“The penultimate element the management team like to highlight is their attention to volatility. Their decision to only invest in companies owning real assets chimes with their aim of delivering price stability for investors,” Lane added.
“And lastly, [the managers] underline the sustainable credentials of the fund. Investing in projects providing essential services to communities, as well as financing the transition to a green economy, are central to the mangers’ philosophy.”
FP Foresight UK Infrastructure Income has an OCF of 0.65 per cent and yields 4.60 per cent.