Global equity funds pull in dividend growth for Income Growth portfolio

Income investors are becoming increasingly aware of the attraction of shares. Not only do shares offer an appealing immediate income but there is also the potential for increasing dividends over the long term. Investors are also no longer restricted to UK shares, because more income funds are also investing in overseas companies.

Tony Yarrow has reflected these trends in his new income growth portfolio, the majority of which is invested in equity funds. The remaining third is divided between property and bonds with a small amount in commodities. The average yield on the portfolio is 4.6%.

The largest holding in the portfolio is Evenlode Income. This is actually one of Wise Investments' in-house funds, managed by Yarrow's son, Hugh. Prior to joining the company in 2009, Yarrow Jnr had worked for seven years as an investment manager at Rathbone Unit Trust Management. The reason Tony Yarrow has included it in the portfolio is because of its focus on larger companies.

"I think the re-rating of small and medium-sized companies has gone too far and that the best value is now in large companies," he says. "Many of the companies are exposed to the emerging markets, which we still believe will produce gains over the long term."

The next 30% of the portfolio is divided between three equity income holdings - RWC Enhanced Income, Artemis Global Income and Murray International.

The RWC fund is managed by Nick Purves, Ian Lance and John Teahan. It consists of two elements: a portfolio of UK income shares, and call options which are sold against these shares in order to increase the level of income.

This procedure can limit the capital gains on the fund, but it means the income is higher. The fund is currently yielding 6.6%. Yarrow likes the managers' highly defensive stance with their equity portfolio.

Adaptive fund

Yarrow says he likes the Artemis fund, managed by Jacob de Tusch-Lec, because it is very adaptive to market conditions. "It is not style-driven. It has done well as a result."

Murray International investment trust, like the Artemis fund, invests globally. It is managed by the highly respected Bruce Stout. Its shares have been trading on high premiums to net asset value (NAV), but the price dropped recently and the premium narrowed.

Yarrow jumped at the change in the rating to invest in the shares. "The trust offers an excellent blend," he says. "It is 50% invested in blue-chip companies in the developed markets, 25% in Asia and 25% in emerging markets."

The portfolio's next largest holding is JO Hambro UK Equity Income. Yarrow says his reasons for choosing this fund are simple. "The managers, James Lowen and Clive Beagles, are excellent at choosing the right shares and they are adaptive, which is good in the current situation."

Buying opportunities

Although sentiment towards Asian and emerging markets has cooled recently, Yarrow thinks this has provided some excellent buying opportunities. He has included two Asian income funds in the portfolio.

One is Aberdeen Asian Income Fund, an investment trust managed by Hugh Young and his Singapore-based Asian equity team. "This trust has never been on a discount to NAV until now," Yarrow points out. "Investors appear to have fallen out of love with Asia but we look for value and we see a lot of value in Asia at present."

The other holding is Liontrust Asian Income, managed by Mark Williams and Carolyn Chan. Yarrow says: "I like their investment process and the fund did least-badly in its sector in the recent sell off."

Yarrow's main reason for including fixed income in the portfolio is to give it some balance. He has chosen two holdings - Royal London Sterling Extra Yield Bond Fund and UK 3.5% War Loan. The Royal London fund is managed by Eric Holt. "If there is any value to be found in high-yield bonds, Eric Holt will find it," Yarrow says.

Property-focused holdings

His two property-focused holdings are International Public Partnerships and Picton Property. Both trusts have relatively high yields and lower premiums to NAV than others in their sector.

Picton Property cut its dividend around 18 months ago in order to spend more on getting its lettings up to 100% and to boost its cover for future dividend payouts. Yarrow says there is also a strong chance that it will start increasing its dividends again soon. Although he would rather not be paying a premium for the trust, which is currently at 10% to NAV, Yarrow feels it would be a mistake not to invest in the sector, as he believes the commercial property recovery has further to go.

The final holding is BlackRock World Mining. Yarrow reckons this trust has the best investment team in the sector, led by Evy Hambro, and that we are near the bottom of the cycle for commodities. "In the meantime the trust is paying quite a good income." Yarrow expects the coming year to be positive for dividends, but believes there is also uncertainty because of quantitative easing tapering.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.