Choosing Funds for Reliable, Regular Income

VIDEO: Funds must pass two key tests to earn their place in the portfolio of Rob Burdett, manager of the BMO MM Navigator Distributor fund 

Holly Black 9 July, 2019 | 11:02AM
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Holly Black: Welcome to the Morningstar series, "Why Should I Invest With You?" I'm Holly Black. With me in the studio is Rob Burdett. He is Manager of the BMO Multi-Manager Navigator Distribution Fund. Did I get that right?

Robert Burdett: You did.

Black: Welcome to the studio.

Burdett: Thank you.

Black: So, what does that mouthful of a fund do?

Burdett: So, it's a multi-manager distribution fund. So, its aim to provide a reliable regular income. In fact, in our case, in the top decile of the sector, the yield. So, that's the target.

Black: And a multi-manager fund picks other funds to invest in. So, how many are in the portfolio?

Burdett: Usually, it's between 30 and 35 underlying funds. But importantly, there's lots of areas we're leaving out. So, that might sound like a lot of funds. But they are individually very carefully chosen. So, there's no passengers, no padding, everything has to count.

Black: And is there a particular type of fund that you are attracted to?

Burdett: So, we've got two tests we're looking for. One is that the yields of each underlying fund is natural income. Nobody wants their capital given back to them as income, not least it's tax inefficient that you are eroding the capital base. So, that's the first test. Second test is, and it's a little bit more subjective and our opinion is that on a five-year view the capital should have a good chance of at least being intact ideally in real terms after inflation to keep that capital base there for future income growth.

Black: And is there anything that you avoid that is a red flag when you come across a fund?

Burdett: I guess if the income was a bit iffy that it wasn't natural yields. So, that's sort of a negative filter for us. And I guess, we're looking for to understand how the year might progress. So, in equities, companies grow their dividends over time typically. So, that's fairly straightforward. But in some other areas we've seen a rush to income products that's driven the risk/return to unacceptable levels we think. So, we're trying to avoid that.

Black: So, income has been harder to find in recent years. So, how are you finding it? Are you mostly in sort of equity funds that are getting income from dividends or is it bonds?

Burdett: So, the portfolio today is a little over half invested in equity income funds and we're expecting the dividends there to grow the share by at least 5% and next year the guidance is broadly similar. So, you are getting growth on half the portfolio. And yields are really attractive. So, the yield share at the moment is yielding around about 4%, which is compared to interest rates and bonds is a (possible) high. So, that's quite attractive in its own right without the growth. The other half of the portfolio is invested in bond funds but very carefully selected. We may be come on to that. We are avoiding government bonds, investment-grade corporate bonds. We don't have any dedicated high yields. We are looking for other things that are going to be unaffected by the direction of rates and where we might have a bit more security for the yields we are getting. So, that might be floating rate or asset-backed.

Black: Okay. And how do you manage when you are investing in a range of equity income funds or a range of bond funds making sure that the portfolios you are investing in aren't overlapping too much?

Burdett: So, we sign legal agreements to receive the portfolios and we run those through software to individually learn more about the funds and make sure that managers do what they say they are doing. And then, we can blend them into the mess we've made with the multi-manager and correct any accidents or enhance the overall balance. So, it's all about the underlying managers, but the portfolio construction is a vital part of it.

Black: So, what are some of the themes in the portfolio that you are most excited about at the moment?

Burdett: So, right now, equities I think offer good risk/rewards. There are some challenges ahead. We're expecting global growth to slow down. But you are being paid quite well for that risk. In – or U.K. we've talked about, we're overweight the U.K. and that's quite unusual. We've seen and amongst our peers. We like small-cap. Small-cap is quite cheap on a historic basis. It may be volatile, but I think the argument there is you get the growth that – quality growth funds which are older age at the moment offer but without the ratings that those kinds of funds appear to be on.

Black: Super. Well, thank you so much for your time.

Burdett: It's okay. Thanks. Thanks for asking.

Black: And thanks for joining us.

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
CT MM Navigator Distribution C Inc48.77 GBP-0.31Rating

About Author

Holly Black  is Senior Editor,


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