Manager of the Quilter Investors Monthly Income and Income and Growth portfolios Helen Bradshaw has been adding to the funds' alternatives exposure since the March sell-off in efforts to diversify their income stream amid widespread cuts to equity dividends across global markets.
Launched last year and with combined assets of around £200m, the funds have been deploying cash reserves into vehicles investing in assets across property, infrastructure and music royalties in efforts to maintain a pay-out of 2.7p to 2.9p for Monthly Income and 2.6p to 2.8p for Income and Growth for the next financial year.
Speaking to Investment Week, Bradshaw noted increased allocations to infrastructure trust INPP and property REIT Assura as examples of existing alternative investments the trust had topped up in Q2.
She explained that Assura has performed "particularly well this year", while "the nature of its underlying cash flows" combined with "very resilient" NAV performance, had made it a particularly attractive opportunity this year.
Bradshaw said: "For property companies to have seen little impact [from the coronavirus] in the last few months has been quite unique."
With regard to INNP, she added: "Many of the infrastructure and renewables trusts back in Q1 as markets sold off saw price declines too and their net asset value erode, which provided a good opportunity to add some of those holdings."
Bradshaw has also added a new holding with music royalties trust the Hipgnosis Songs fund, which is currently offering a yield of just over 4%.
"The unique nature of the asset means it is relatively uncorrelated to other asset classes. But we are also attracted to the stability of its income streams, where the economic cycle shows no obvious effects on streaming," Bradshaw said.
"We were looking for opportunities like that. We had a bit of cash and we are trying to be opportunistic and put that to work as and when we see decent opportunities.
"Hipgnosis' distributions have actually remained stable and they have a very positive outlook. If you look at Spotify's results for Q1, it shows consumers' willingness to pay for streaming has not been affected by the market backdrop and it actually saw an increase in paid streaming subscribers."
The Monthly Income and Income and Growth funds allocated 39.8% and 61.8% to equities respectively as of 30 June, according to their latest factsheet. Meanwhile alternatives exposure stands at 7.4% for Monthly Income and 6.3% for Income and Growth.
High yield rotation
The second quarter of 2020 also saw an increase in the funds' fixed income exposure, notably adding to high yield having initially reduced exposure in the previous quarter.
Bradshaw explained that the funds' exposure to high yield had been reduced back February as markets began to react to the coronavirus pandemic, while oil firms in particular came under pressure. However, the manager has since added back to the asset class in response to mass corporate bond purchases by the Federal Reserve.
She said: "When we saw support from the Fed for the corporate bond market and extend this with ability to buy fallen angels we thought it was a real game changer and this made the asset class more attractive."
There has also been turnover in the funds' government bond exposure, with Bradshaw adding gilts into the portfolios before taking profit on some of that exposure in June after a strong post-March rally. The funds' exposure to treasuries has also increased.
At the end of June the Monthly Income fund allocated 52.6% of its portfolio to fixed income, with 16.6% in high yield and 2.4% in government bonds. Income and Growth allocated 31.6% to fixed income with 8.6% in high yield and a marginal allocation to government bonds.
A year since launch, Monthly Income is down 3.4% and Income and Growth is down 3.6%, according to FE fundinfo. The IA Volatility Managed sector is down 0.8% over the same period.