Fund managers have struggled to deliver consistent total returns from their equity income funds over the past couple of years, as the banks and other high-yielding blue chips that are the mainstays of their portfolios have underperformed.
The star performer in the sector, the Legg Mason Martin Currie Real Income Fund, has a different approach. It invests in listed Australian companies that hold “real assets”, such as property, utilities and infrastructure.
According to the latest Mercer Investment Survey, the Real Income Fund produced a total return of 9.8 per cent over the 12 months to the end of January – one of only three of the 19 income-oriented Australian equity funds in the survey to produce a positive total return over the period.
The Real Assets Fund paid income of 4.7 per cent over the year, with franking credits taking that up to 5.1 per cent.
The fund is ranked top in the Mercer survey (in the income-oriented category) for one, two and three-year returns.
Martin Currie portfolio manager Ashton Reid says the characteristics of real asset returns, which combine the predictability of bonds and the inflation-linked growth of equities, makes them almost a separate asset class.
The breakdown of the portfolio is 50 per cent real estate investment trusts, 35 per cent utilities and 15 per cent infrastructure.
“These businesses tend to be independent of the business cycle, with the customer base for toll roads and electricity grids driven more by population growth. They also have pricing power that allows them to match changes in inflation,” Reid says.
“Last year a whole range of factors weighed on equity markets; they included slowing global economic growth, trade wars, Brexit and the Royal Commission. Real assets showed their defensive traits in that environment.”
Some equity income funds have continued to pay good income, while suffering a loss of capital value, which raises the question of whether it matters the capital values fall when the companies are still paying good yields.
Reid says: “If you are getting an income payment each quarter, you may not care about the market price. But you want that income to grow over time and the falling market price is telling you about the growth prospects for that business.
“The thing you want to see with these funds is a good yield and also growth in income over time.”
Reid says the Real Income Fund is on track to provide a yield of 6 per cent (grossed up for franking credits) in the year ahead.
He says there are currently investment opportunities in the office segment of the REIT market and some regulated utilities, particularly gas and electricity suppliers.