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Investment Committee Sector Considerations: Expensive income

27 February 2020

In our regular series, the FundCalibre research team analyse a specific sector or asset class.

After more than a decade of low interest rates, and the seemingly unstoppable rise of stock markets, the search for income-producing investments continues to be both challenging and expensive: you either have to pay up for quality assets and hope that earnings will continue to meet expectations, or take a chance on those few that remain under-valued.

As we don’t particularly like bonds – or, more specifically, don’t think the yield levels are reward enough for the risk – some more niche areas we’ve repeatedly turned to are infrastructure, social housing and healthcare.  But infrastructure investment trusts in particular have become ever more popular and the sector, which by its nature tends to trade on a premium, can get very expensive.

At the time of writing, for example, the average premium is above 18% and most trusts are at the higher end of their range. So we’ve been far more active – and indeed short-termist – buying when premiums fall and selling when they once again get toppy.

But every time we sell it leaves a big income gap, so our conversations of late have turned to Japan, Europe and the UK where the stock markets at least are less expensive. Japan isn’t a high yielder though and with the exception of Baillie Gifford Japanese Income Growth, there isn’t a lot of choice. Europe has a higher yield but equity income options are still surprisingly limited. We like BlackRock Continental European Income. In the UK we’ve gone all in – opting for unloved smaller companies in the form of Montanaro UK Income.

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