Investor Views: “I am Running my Own UK Equity Income Fund”

Private investor Oliver Balcomb explains how he has built his own equity income portfolio

Emma Simon 29 June, 2016 | 11:35AM
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Oliver Balcomb may only be in his 20s but he is already a keen income investor.  He says: “I’m looking to invest in shares and funds that pay a decent return that can be reinvested to boost future growth. I think this is the best way to grow my money long-term.”

To this end he’s invested in a range of different assets including blue-chip shares, infrastructure funds and property holdings.

When it comes to UK investment Balcomb says he has steered clear of traditional equity income funds.

He explains: “When you look at the portfolios of many of the most popular equity income funds they hold very similar investments. I’ve chosen to invest directly in blue chip shares that pay decent and stable dividends. I think this is far more cost-effective. I don’t see why I need to pay a fund manager around 1% a year to manage such investments for me.”

As part of this portfolio he currently holds in his ISA both Vodafone (VOD) and National Grid (NG.) shares.

Balcomb says: “I notice there’s a lot of comment at the moment about whether income-paying shares, like these, are over-valued. My thinking is that over a 10-year plus cycle the value of these shares will chop and change.

“What I am interested in is whether there is consistent cash flow to support and grow these dividends, so I can reinvest this money and grow the value of my savings. I think both companies are in a good position to do this.”

Paying a Premium for Income

Vodafone has a three-star rating from Morningstar. Allan Nicholls, an analyst at Morningstar says its remains “fair value”, adding “fears of the impact of Britain's exit from the European Union have pushed down the prices of most European communication stocks. We think this is an overreaction as we view telecom as a sector somewhat immune to geopolitical changes.”

Morningstar gives National Grid a two-star rating; meaning it is slightly overvalued in current conditions. As well as being one of the UK’s largest utilities it has also made investments in the US market in recent years. Morningstar analysts say this could put it in a position to benefit from a stronger dollar, post Brexit.

The Attraction of Property Investments

Balcomb has also invested directly into property through Property Partner, a company that buys and manages residential properties and sells shares in these flats and houses to private investors. This investment outfit is backed by Index Ventures and Octopus Investments.

He says: “Until fairly recently, unless you had the money to put down a deposit on a buy-to-let the only property investments available were in commercial property.”

He says he know owns shares in about 10 different properties through Property Partner. These are revalued on a monthly basis to take into account any appreciated - or depreciation - in the property value. Shareholders also get a share of the rental yield and can if they want sell holdings on a secondary market.

Balcomb says: “It is this secondary market that appealed. I’ve been able to snap up a couple of shares at a discount to their current value because existing shareholders needed to sell quickly.”

Balcomb, who lives in London and is training to be a financial planner says he initially bought these shares to get some exposure to the residential property market, while he saved for a deposit for his own property. He is completing on a property purchase this week but says he will continue to hold these shares as a long term investment.

Infrastructure Remains a Good Defensive Holding

However, the trainee does not shun the fund universes completely. Balcomb says he’s happy to pay annual management fees when investing in more specialist areas or for overseas markets, where it hard to access individual companies.

For example, he currently invests in infrastructure through the Bronze-rated unit trust First State Infrastructure and the investment trust, John Laing Infrastructure (JLIF).

He says: “Again these are good income producers and good defensive holdings that should hopefully produce steady returns regardless of underlying economic conditions.” He points out that people will still use toll roads and travel by train even through recessions.

Fatima Khizou, an analyst at Morningstar says the First State fund, managed by “seasoned manager” Peter Meany is a “solid choice for investors seeking exposure to this space.” The fund has, she says a well-resourced team of infrastructure specialists and a proven process.

ISA Funds for Overseas Exposure

Balcomb’s other ISA holdings include Fundsmith Equity and Newton Asian Income which both have five star ratings from Morningstar, reflecting their strong outperformance in recent years.

Morningstar says the Bronze-rated Fundsmith Equity “remains an attractive choice for investors seeking global equity exposure”.

The Newton fund has slipped to just a ‘Neutral’ rating, following the departure of its fund manager Jason Piddock last year. Morningstar said: “Although we continue to see some positives for this fund, the amount of change at the manager and team levels precludes a higher Morningstar Analyst Rating.”

Balcomb adds: “In haven’t added much to my ISA this year, as I’ve been saving to buy my first home. But hopefully I’ll continue to add to it. The market instability caused by Brexit may present some buying opportunities.”

He currently has a couple of pensions with a former employer, but is looking to consolidate these within a SIPP to give himself more investment control. The key he says is keeping a keen eye on markets, and company information. “Knowledge is power. I regularly read fund reports, annual company statements and keen an on how markets are performing. This helps inform the investment decisions I make.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BNY Mellon Asian Income GBP Inc2.20 GBP0.27Rating
First Sentier Glb Lstd Infra A GBP Acc3.05 GBP0.04Rating
Fundsmith Equity R Acc5.72 GBP-1.87Rating
National Grid PLC1,081.00 GBP0.00Rating
Vodafone Group PLC118.78 GBP0.42Rating

About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk