Whilst the threat of the removal of franking credit refunds is still some time away, and faces the brunt of a crossbench filled with minor parties, we thought it worth looking at some opportunities to add a more focused income producing strategy to your portfolio. The Investor’s Mutual Equity Income Fund has an interesting strategy, often employed by stock brokers for major clients, that is utilised to produce more income for investors.
For some background, Investors Mutual was established by the highly regarded Anton Tagliaferro in May 1998 and has built a reputation as one of Australia’s most consistent Australian equity managers. They now offer seven different Australian equity funds with around
$10bn managed by three portfolio managers (Tagliaferro, Hugh Giddy and Simon Conn) with in excess of 20 years of direct investment experience each, supported by a team in excess of 30 staff. Investors Mutual is partly owned and supported by Natixis Global Asset Management, a specialist investor in funds management companies, who take care of distribution.
Why Investors Mutual?
The team have built a reputation as one of the more astute and disciplined value investors in Australia by outperforming their objectives over a long period of time. This focus is built around fundamental analysis with a focus on company quality and gaining access to management rather than focusing on financial statements. The entire team focuses solely on analysing Australian equities, across both the large and small cap sectors, which means there are limited distractions and a fairly select universe from which to choose. This fund differs from the majority of its competitors via its flexibility to use options strategies in order to improve the income produced by the fund. These options strategies are used to improve the income delivered to investors and reduce the volatility of the fund. Very few specialist income managers venture into the use of options, preferring to remain exposed to the day-to-day volatility, however, for those with experience the strategy can add materially to returns.
Why the Income Bucket?
The fund meets the requirements of the Income Bucket by seeking to generate an income that exceeds the dividend yield of the ASX 300 by at least 2% and experiences lower volatility than the market over rolling four-year periods. The fund has consistently achieved both these targets having delivered an income of 8.9% per annum since inception in 2011. The fund offers diversification within the Income Bucket through its more diversified portfolio and willingness to avoid or overweight any sector (including the banks) rather than follow the benchmark as most competitors, listed investment companies and exchange traded funds operating in this sector seem to do. This has meant investors have benefitted from higher weightings to energy and utilities in recent times and an under weighting to financials. The fund currently holds 80% in ASX shares and 20% in cash which is required to fund the net 5% position in exchange traded options.
Performance & Top Holdings:
The fund has performed well over the long-term, adding 9% compared to the benchmark of just 6.7% per annum. Importantly, of this return 8.9% was delivered in the form of income. The fundamental value approach of the fund saw it underperform in 2018 as high growth technology companies drove the benchmark ASX 300 index higher, the result being a net return of -4.3% compared to the index of -3.1% for the 12 months to December. This should be expected from time to time as the managers are seeking a high quality, less volatile portfolio that supports a quarterly distribution for investors, rather than chasing momentum and hot companies. At present the fund is substantially overweight Utilities companies and underweight materials, consumer staples, financials and healthcare compared to the index. The fund holds 44 individual stocks with key holdings being: Transurban, Caltex, Spark Infrastructure and Crown Resorts, with the major banks and Telstra recently making a return to the portfolio.
Should you invest?
We believe this fund offers and attractive diversification opportunity within the Income Bucket and expect the