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Three funds for a diversified income

Daniel Lane

Daniel Lane - Fidelity Personal Investing

The search for income has pushed many investors up the risk scale over the past decade. However, as the longest bull market ever looks long in the tooth, it has never been more important to make sure these income sources are well diversified. 

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Here are three ways to add uncorrelated income streams to your portfolio, all from the Fidelity Select 50 list of our analysts’ preferred funds.

M&G Optimal Income

The M&G Optimal Income Fund seeks to provide investors with total returns through exposure to the best income stream possible. 

In contrast to traditional income-orientated funds, the M&G portfolio is not compelled to invest in specific parts of the market where returns might be correlated with what’s happening in the economic cycle. Unusually, this includes the freedom to invest up to 20% of its holdings in the stock of individual companies if they look attractive relative to bonds.

In order to get the most from each holding, manager Richard Woolnough employs a three-step approach to populating his fund. 

First, his team looks at the overall market landscape, examining whether a bear or bull market is in force, where growth opportunities lie and how inflation is affecting bond yields. 

Next, Woolnough decides which income source will best suit market conditions. And finally, the manager works with his strong team of over 40 analysts to pinpoint the most suitable stocks for the fund. He says: “They go to the company meetings, they read the documentation, they go to the presentations and they do all the work that helps stock selection.”

With the most unconstrained strategy across all funds in M&G’s bond range, the fund is extremely malleable and can be altered if Woolnough feels it will benefit investors, “We try to look through the whole economic cycle and behave like a bond fund that’s taking lots of credit risk when that’s an attractive thing to do, when we think interest rates and inflation are coming down. At the same time, we have a wide remit to be very defensive. So, if interest rates are going up and bonds aren’t as attractive then we can be very defensive.”

Fidelity Global Dividend

With a global remit, fund manager Dan Roberts has the freedom to roam around the world in search of reliable and growing dividends. That’s a big advantage because sectors tend to cluster in certain geographies and be notably absent from others. Technology, for example, is not a feature of the European markets but is strong in the US and Asia. Asian investors do not have much exposure to healthcare.

Roberts says: “If you think about investing in a single country fund, there might be a couple of hundred stocks to choose from; globally there may be ten times as many. So, there’s much more opportunity to invest in the best stocks within a sector but also the opportunity to gain access to sectors that may be under-represented in a local index.”

Another key feature of this fund is its focus on capital preservation as well as income. Roberts is a mathematician and a former accountant and this shows in his approach. He is a disciplined, numbers-focused investor with a focus on cash conversion, earnings persistence and balance sheet strength. He follows Warren Buffett’s dictum that the first rule of investment is not to lose money.

Roberts’ approach focuses on identifying good-quality companies on attractive valuations which can thrive and pay a well-covered dividend under a wide range of economic scenarios. 

“I want to make sure I don’t overpay; I also want to invest in a resilient business where I can have really strong conviction in our assessment of what a company is worth”, he says.

FP Foresight UK Infrastructure Income

Nick Scullion, the head of Foresight Capital Management, is joined by Mark Brennan and Carly Magee in running this fund, targeting a 5% annual income through an active portfolio of UK listed renewable energy and infrastructure investment companies.

A recent addition to the Fidelity Select 50, the fund offers five distinct advantages for investors, according to the management team.

First is the portfolio’s ability to act as a ‘shock absorber’ for investors. Scullion explains: “The infrastructure asset class offers investors meaningful diversification from traditional alternatives as well as from equity and fixed income asset classes.”

Holding a range of income streams from uncorrelated sources means different parts of the portfolio can be firing at any one time, reducing investors’ reliance on one asset class in particular.

Second is the ability of many companies in the fund to often benefit from protection against inflation. This is thanks to the underlying revenues being directly linked to inflation.

Next is the inherent nature of renewable energy and infrastructure, in particular the high barriers to entry and long term contracted revenue streams involved in both. This stability and predictable demand lends itself well to strategies seeking a long-term steady income.

The penultimate element the management team like to highlight is their attention to volatility. Their decision to only invest in companies owning real assets chimes with their aim of delivering price stability for investors.

And lastly, Scullion and co underline the sustainable credentials of the fund. Investing in projects providing essential services to communities, as well as financing the transition to a green economy, are central to the mangers’ philosophy.

Important Information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the Fund investing in them. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

What you could do next

Read more about M&G Optimal Income Fund

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.

Read more about Fidelity Global Dividend Fund

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.

Read more about FP Foresight Infrastructure Income Fund

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.

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