This £1.1bn fund was launched in October 2007 and has been managed since inception by Gary Potter and Rob Burdett and their team.
Mr Potter notes the vehicle’s aim is to achieve the majority of its returns from the income side of the portfolio, with the target of a top-decile return in its sector in terms of income generation.
He says: “It was always our expectation that this fund would produce a relatively high, consistent income. We didn’t really appreciate how important income was going to become in 2007 as interest rates were quite high then, so we had to compete with bank deposits.”
The manager notes that although the same investment process applies across the Navigator range of funds, the Distribution offering “was slightly distinct from our other products… and was different to what we did in the past”. He explains: “This was new for us – a fund with a particular objective to provide a relatively high income.”
The team’s process for achieving this income focuses on diversification and the power of compounding high and sustainable dividends. Mr Potter says: “We thought if we could find a collection of different types of income funds and put them together in a very sensible, diversified way, not only would we have lots of ‘air bags’ in our portfolio, we would drive a diversified income return. This has been proven to generate a consistent income return in the long term.”
But he stresses that the income does not come at the expense of capital, pointing out that the team is seeking “natural” income. “We’re trying to get as high an income as possible in the confines of a risk-controlled environment but without seeking to use capital to augment income.”
The manager adds that the fund’s natural income yield is roughly nine times higher than that for the average vehicle in the Investment Association (IA) Mixed Investment 20-60% Shares sector. He attributes this to the diversification of the portfolio, which holds 34 different positions that in total offer more than 2,000 sources of income. “We spend a lot of time looking at correlation, so we find that we don’t put it all on red and black comes in,” he says. “There is a vast array of different things that are not dependent on each other in terms of correlation. What this means is that when something’s not working properly something else is.”
The fund’s clean C-share class sits at a risk-reward level four out of seven, while ongoing charges sit at 1.47 per cent, its key investor information document shows.
The fund has almost doubled the return of its sector since launch, delivering 42.5 per cent to October 15 2015 against the IA Mixed Investment 20-60% Shares sector average return of 28.7 per cent, data from FE Analytics shows. It has also outperformed its peers across three and five years, although its 12-month return of 4.2 per cent is slightly behind the sector’s 4.9 per cent.
The vehicle’s positioning has remained fairly stable, with the most recent change being the addition of a 1 per cent holding in the TwentyFour Asset Management-run UK Mortgages fund.
Mr Potter points out one of the strongest contributors to performance has been its position in UK caravan park investor Darwin Leisure Property, which he acknowledges “has been one of the most successful investments we’ve ever made”. The holding has been in the portfolio since 2008 and still produces a dividend yield of roughly 5.5 per cent.
He says the fixed income section of the fund also differs from its peers, with a preference for more strategic and specialist bond offerings rather than the traditional big name houses and funds. “We are quite cautious on our fixed income views; we think it is relatively fairly valued but there are still opportunities,” he notes.
While the team doesn’t like to change holdings too often, the manager points out one of the correcting mechanisms in the portfolio is that “if something produces a good yield but does well and the yield is less compelling, then we tend to move it on”. He adds: “Yield drives this portfolio and the correlation of the different holdings is quite diversified. You’ve always got something working for you and yield coming in, and it’s a pretty robust ship that’s sailing through what can be some choppy waters in the markets.”
EXPERT VIEW
Rob Morgan, pensions and investment analyst, Charles Stanley Direct
Rob Burdett and Gary Potter are already well known to many advisers, so will need little introduction. In my view, their willingness to embrace a diverse range of asset classes in this fund, and to be highly flexible in geographic asset allocation, makes for an excellent core income holding for a wide range of investors. Around a core of equity income and bond funds – many of which are strategic or more specialist in nature – are currently more tactical total return plays, such as emerging markets funds. One significant call is the limited exposure to US equities.
