Income funds with a focus on Asia, the UK and Europe are at the top of the list when it comes to strategies that the Quilter Cheviot team thinks could do well in 2020. 
Offering his fund picks for the year ahead, Quilter Cheviot head of investment fund research Nick Wood (pictured) backed Matthews Asia ex Japan Dividend, Montanaro UK Income and Schroder European Alpha Income.
“All three funds have an income bias and could be seen as going against the grain a little, given investor nervousness around China and Hong Kong, the UK and Europe,” he added.
Below, we look at why Quilter Cheviot likes these three income funds for the coming year.
Matthews Asia ex Japan Dividend
Wood’s first pick is the $76.6m Matthews Asia ex Japan Dividend fund, which has FE fundinfo Alpha Manager Yu Zhang as its lead with Robert Horrocks, Sherwood Zhang and Joyce Li as deputies.
The portfolio is built around companies that pay a growing dividend and have a strong balance sheet to continue paying that dividend. The team believes dividends can be an important signal about the business quality and management’s ability to allocate capital well, while it also owns companies with significant family or management ownership.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
“Firstly, we like the fund’s bias towards the growth in the Asian consumer, which we believe is a positive long-term driver. Additionally, the fund tends to have exposure to smaller companies as well as more ‘frontier’ markets such as Vietnam, a growing market which has also benefited somewhat from the US-China trade war,” Wood explained.
“Finally, the portfolio’s composition of balancing more volatile areas of the market (small/mid cap and frontier Asia) with companies in developed Asia with strong balance sheets and good management helps capital preservation in more volatile periods.”
Over the three years to the end of 2019, the fund made a top-quartile total return of 41.30 per cent, outperforming its average IA Asia Pacific Excluding Japan peer and MSCI AC Asia ex Japan benchmark. However, it has dropped into the third quartile over one year and the bottom quartile over shorter time frames.
Matthews Asia ex Japan Dividend has an ongoing charges figure (OCF) of 1.25 per cent.
Montanaro UK Income
Next up is Charles Montanaro’s £524m Montanaro UK Income fund, which has a focus on small- and mid-sized, higher quality businesses that have a dividend yield of at least 1.5 per cent with the potential for growth.
Wood noted that concerns around the UK’s departure from the EU have hit sentiment in UK stocks hard in recent years, especially those more linked to the domestic economy. However, he believes this fund could be “a potential winner”.
Performance of fund vs sector over 5yrs
Source: FE Analytics
“It is clear that smaller companies remain relatively unloved in the UK, despite doing well operationally this year. It has also tended to hold up better than other smaller company funds in falling markets, however. With 29 per cent of the fund’s investments having a net cash position that should continue to be the case,” he explained.
“The fund has done well in 2019, but it could it still perform relatively well next year. Absolute performance would of course depend on the state of the UK economy. It is also somewhat more liquid than other smaller company funds, something we are very conscious of post-Woodford. Charles Montanaro has been running money this way since 1991, and the team of 10 analysts is the largest in Europe within the small- and mid-cap space, so the experience and resource are clearly in evidence.”
According to FE Analytics, the fund is currently top-quartile in the IA UK All Companies sector over one, three and five years. Over the past five years, its 75.79 per cent total return has outpaced its average peer by around 30 percentage points.
Montanaro UK Income has a 0.86 per cent OCF and is yielding 3.40 per cent.
Schroder European Alpha Income
Wood’s third and final pick is the £851.7m Schroder European Alpha Income fund, which is headed up by James Sym.
Schroder European Alpha Income follows a business cycle approach, which aims to identify the types of companies that do well in particular stages of the business cycle. The approach has led to the portfolio to have a tilt towards cyclical businesses at the moment.
The fund had a strong early track record since launch in 2012 – outperforming in its first four full calendar years – but has dropped into the IA Europe Excluding UK sector’s bottom quartile during 2018 and 2019.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
However, Wood said: “We rate Sym highly and the combination of manager skill and a portfolio of undervalued stocks is attractive. Sym makes a persuasive case for Europe, arguing that the consumer is looking strong, that governments are likely to start spending more, and that capital expenditure is likely coming back.
“The fund’s current pro-cyclical value style would strongly benefit from a reflationary environment, and while Sym is probably not in the majority, his fund offers investors an interesting opportunity to diversify their more growth-focused holdings.”
Schroder European Alpha Income has an OCF of 0.92 per cent and is yielding 3.34 per cent.