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Few investors will look back on 2022 fondly, but if part of your remit as a DFM is to manage an income portfolio then there was some respite.

At the start of the year, Asset Allocator crunched the numbers and found the average yield on the balanced income model portfolios we cover was a skinny 2.7 per cent.

As the year draws to a close, we ran the numbers again (it was that or look at how our Isa has fared and, well….) and for those with income as a primary focus, the average yield has risen to just shy of 3.3 per cent.

A 60 basis point rise over the course of a year would normally be cause for champagne corks to pop and cruises to be booked, but 3.3 per cent still represents an acutely negative real return.

As ever, there are outliers swinging either side of that average but the delta is particularly wide this time. 

The DFM with the highest yielding income portfolio is Handelsbanken, at 4.54 per cent.

They are achieving this with large overweights to bonds and alternatives.

Handelsbanken’s balanced income portfolio has an allocation of 42 per cent to bonds (compared to an average of 30.5 per cent) and an allocation of 23.5 per cent to alternatives (compared to an average of 12 per cent).

Of course, alternatives cover a multitude of sins but a glance at the Handelsbanken portfolio reveals places among the top ten holdings for a gold ETF and an investment trust specialising in debt secured by approved life science products.

The model portfolio with the next highest yield is RSMR, which has a yield of 4.2 per cent. The lads and lasses in Yorkshire maintain a modest underweight to equities at 45 per cent, and an even more moderate overweight to bonds at 32 per cent. 

They maintain a moderate underweight to alternative assets as well, with a 10 per cent exposure. 

The moral of the story is that allocators remain heavily dependent on equities for generating yield, with UK equities continuing to play an important role.

The average allocation to UK equities in balanced income portfolios is 18.7 per cent.

As Asset Allocator readers will well know, UK equities have been more in vogue (and indeed in profit) this year as a result of sectoral exposure to areas such as oil and mining, which pay large dividends.

Market conditions in 2023 already look likely to diverge, creating a different set of challenges for income investors, and we will of course recount those in the coming year. 

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