Firing Line: Vincent McEntegart – 'Diversification is the only free lunch in investments'

No, he is not being facetious.

Mr McEntegart manages Kames Diversified Income fund which has had a 5 per cent monthly income target since its launch in 2014. The fund also aims for some capital growth.

The £302m multi-asset fund currently invests in around 240 securities across a range of sectors and adopts a due diligence process that is typical of the industry.  

Here is where the fund deviates from the status quo: the portfolio comprises a mixture of holdings with an income target that sits underneath or above 5 per cent.

The rationale is about providing a blend of different risk characteristics, Mr McEntegart: “Diversification is the only free lunch in investments. By blending different assets, you can reduce risk. We believe that every security is a good investment and will increase in value in the future, but you cannot get everything right. Some holdings may go up while others go down.”

A sizeable chunk –around 50 per cent- of the fund is invested in bonds and equities yet both these asset classes have struggled to generate good returns in the current investment climate.

Mr McEntegart concedes that coupons offered by traditional sources of income are at risk of being eroded by inflation, which recently rose to 1 per cent, while the threat of a hike in interest rates also looms.

The fund is able to generate higher than average dividends through active fund management as well as exposure to riskier alternative assets, he added.

He said: “We do not refer to these holdings as alternatives because we do not know what the term means. We call it specialist income. These assets have to be listed somewhere so investors are able to get a price on each of our securities.”

Three asset classes the fund currently favours are infrastructure, renewable energy and the more left field aircraft leasing.

The latter is particularly noteworthy. Aircraft leasing allows airlines to expand their fleet without purchasing a plane outright. Once the lease matures, the leasing company could sale the airplane outright – although the value of the vehicle could depreciate drastically over time, Mr McEntegart said.

Investing in these companies gives investors an opportunity to earn yields as high as 8 per cent without taking on the greater risk of investing in an airline shares, according to Mr McEntegart.

The fund has no exposure to gilts because of low yields, while gold is a capital growth only investment vehicle by its nature.

Similarly, Mr McEntegart expressed little appetite for biotech companies because “they focus on research and development and only start to pay out in five years, or so, time – and that is only if they are successful.”

He added: “A lot of technology companies have great fundamentals and books but do not offer dividends to investors. Those that do not offer great dividends.”

To adapt a popular colloquial expression, the credibility of the strategy is in the pudding. According to FE Analytics data, the Diversified Monthly Income B Inc currently yields 5.15 per cent and boasts a historic yield of 5.14 per cent.

Since inception, the fund has by and large outperformed the IA Specialist sector, but the product has experienced a reverse in fortune as of October this year. At the time of writing, the fund trailed behind the benchmark by around 2.5 percentage points (as at 1 November).

This is not a cause for alarm according to Mr McEntegart. In fact, he said the fund’s performance against the benchmark is somewhat binary, and greater credence is given to how the fund performs against initial objectives.

He added the Kames Capital took the decision to place the fund in the Investment Association Specialist sector because it was reticent to subject the funds to the equity limits of the IA Mixed Investment sectors.

However, the ‘specialist’ tag connotes heightened risk in comparison with traditional investment vehicles.

Mr McEntegart said: “We are asking the market not to ignore us because we are listed in the IA Specialist sector but some investors do. We may live to regret the decision but at the moment, we do not.”

Amid a period of low interest rates, companies face the temptation of taking on debt to buy back shares to bolster dividend yield, but this is not sustainable over the long term according to Mr McEntegart.

He added: “Where we own the equity, we can be very fussy and choose not to invest in such companies. A company with between 60 and 70 per cent of debt on its balance sheet would not be an attractive equity proposition to us but could be a good bond investment.

“This is because at times of crisis, companies repay bondholders first as not to stifle potential investment in the future.”

VINCENT MCENTEGART’S CAREER LADDER

2013- present

Investment manager

Kames Capital

2009-13  

Partner,

Goodhart Partners

2007-09 

Fund director

WestLB Mellon Asset Management

1995-2007        

Co-head, investment manager research

Hymans Robertson

1988-1995       

Alexander Consulting Group (now part of Aon)

1992 

Diploma in Actuarial Techniques

Institute of Actuaries

1987-1988        

Clerical Medical Investment Group

1987 

BSc (Hons) Mathematical Sciences, Strathclyde University