Save & Invest Financial Planning

M&G Episode Income Fund update - 1st June 2017

 

On his recent visit to Save & Invest, fund manager Steven Andrew was keen to emphasise three main points:

The demographics of the nation are changing

With the UK being home to an ever-aging population, so too do the investment demands of its citizens.  As the population ages, having a stable means of income becomes a crucial element to any investment decision. In Steven’s view, capital growth is the key to generating the reliable income stream that investors increasingly crave, with it being the ‘engine of income.’ As such, achieving a strong, sustainable level of capital growth has been a core target for M&G’s Episode Income fund, and one that has been consistently met. Capital growth is currently hitting a relatively modest but sustainable figure of 4%. Working from this solid base, the fund has been able to grow income for each of the last five years, exceeding initial targets. While yield is not overly fixated on, it is certainly not neglected, with a value of 3.93% effectively meeting the annual target of 4%.

World events continue to be unpredictable

To say the past year has been unpredictable would be nothing short of an understatement. The last twelve months have seen TV star Donald Trump become leader of the free world, the UK electorate vote for an unprecedented exit from the EU, and a French presidential election contested by two relative outsiders in Le Pen and Macron, the latter emerging victorious. With the political world going through such a period of turbulence, it is no surprise that the world economy has experienced a certain level of volatility. However, in Steven’s view, the worst of this is behind us and the general economic picture is fairly rosy, with the business cycle on the up and the pendulum of growth swinging back to a far more positive position. Adopting a relaxed, if not outright bullish outlook, Steven is of the opinion that recent political events have merely distorted the markets, rather than fundamentally harmed them, with political noise masking otherwise quite strong underlying economic factors. This volatility, he says, provides investors with a great opportunity to find value, as the markets become influenced by irrelevant factors that have no bearing on long-term performance.  Therefore, despite world stock markets being at or near record levels, his view is that valuations are justified based on underlying corporate earnings.

M&G finding value in US, Japan and Europe

Delving into the specifics of where this value can be found, Steven highlighted a number of areas of interest, avenues that have become increasingly important for the Episode Income fund. US banks have become a key asset in the fund, providing much needed diversification whilst also posting growing earnings and dividend payments driven by rising interest rates.  Staying in the US, there is a 2.4% stake in a technology basket with two longstanding titans of the industry in Microsoft and Apple generating reliable, consistent returns, making them a welcome addition to the fund’s portfolio. In Japan, the fund has undertaken significant disinvestment in the financials market, switching focus instead to a broader array of Japanese equities, in an attempt to benefit from growing earnings and good prices in the sector. South Korea presents a notable opportunity with strong earnings growth occurring despite a slight impact being felt from the presence of the ever-hostile North Korea. In Europe, special attention is being paid to Portuguese government bonds which have become an attractive proposition, although extra caution is being exercised due to fundamental concerns over rating downgrades. Roughly 3% of the fund is tied to property investments with the long-term aim being approximately 5%, and with internal M&G forecasts for this sector having been revised upwards, it appears positive signs are on the horizon.

 

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