Duo’s Thames River Distribution vehicle beats peer group, gaining 20.2% over one year
Launched in October 2007, the £120m Thames River Distribution fund has outperformed its peers in the IMA Cautious Managed sector over the past year, up 20.2% to 1 February, compared to the sector average of 17.6%.
The fund also has one of the highest yields among its peers, 5.5% at 31 December,
Thames River Distribution aims to generate capital growth with an emphasis on income distribution by adopting a cautious investment approach. It invests in both regulated and unregulated collective investment schemes and closed ended funds.
According to Potter, investors showed particularly strong interest in the high yield generated by the Distribution fund and he is confident it will soon become the largest of the five funds he co-manages with Rob Burdett.
“It is currently our second biggest behind the Cautious Managed fund, but I would say within six months this could well be our biggest.”
Potter says the purpose of the Distribution fund is to produce a consistent level of high yield from as diversified a source as possible.
“Our intention when we manage this product is; what gives us yield should be uncorrelated to everything else we own. The purpose is to have as many sources of different types of income as possible so if things take a turn for the worse you do not end up going down with it.”
He says there are currently over 700 sources of income in the fund, with 26 different funds from over 20 investment houses.
He believes Thames River Distribution’s performance is due to this diversification.
Potter says: “The problem with single managed distribution funds is that to only have one manager’s views on bonds and equities is quite dangerous, when so many different things can happen in the market.”
He notes returns have been achieved without holding any conventional real estate.
“We have had some real estate in the form of alternative real estate exposures,” Potter says.
“We hold Darwin Leisure Property fund, which invests in caravan parks, and Celsian Asian Real Estate Income fund for all the growth reasons in Asia but we have largely avoided commercial real estate.”
The managers’ UK equity income fund holdings have helped to boost returns. Potter cites
the performance of Schroder ISF Global Dividend Maximiser and JOHCHM UK Equity Income funds in particular, which have gained over 12 months respectively.
What Potter calls “a healthy dose of diversification” in global equity income funds has also benefited the fund.
“We hold Lazard Global Equity Income and Veritas Global Income, which are both good stockpickers,” he says.
In December the best performing holdings came from First State Asian Equity Plus and Middlefield Canadian Income Trust, up 5.41% and 5.38% respectively. MedicX Trust was a drag on performance, falling 6.37%.
During the month the allocations across the sectors remained broadly unchanged and cash increased by 6.5% as a result of strong cashflow.
Potter says the managers have a self-correcting investment thesis, which helps drive performance.
When equity markets are lower the managers are able to find good forces of yield with equity income funds or global income funds. When equity markets recover they move the fund away from equities and look for alternative sources of yield, such as fixed income.
In recent months the managers have reduced investment grade corporate bond exposure and increased their strategic bond fund exposure. Since the recovery they have also allowed fixed income exposure to wane as cash has come in to the fund.
They have increased their UK equity weighting but the main shift has been to carry on supporting high yield consistent funds. “Schroder ISF Global Dividend Maximiser, for example, is one we have kept topped up,” Potter says.
“We will continue to make sure we manage the income pretty aggressively to ensure we can keep paying a decent income,” he adds.
He points out the past four quarterly payments on the Distribution fund have risen over their prior period the previous year.
“Against a background of income cuts which have been occurring elsewhere we have made sure we focus on the income, because this is what people buy the fund for,” Potter says.
In future, the managers will increasingly look for alternative sources of income outside the UK in both equities and bonds.
Potter explains: “We are becoming increasingly concerned over the outlook for sterling and our UK equity exposure is therefore likely to recede up to the general election, balanced by the view that a large proportion of UK company earnings come from overseas economies.”
