Alan McCarthy: Today I am joined by Mike Brooks, lead portfolio manager of the new Standard Life Diversified Income Fund. It’s an exciting addition to our investment offering as it’s the first fund we have introduced from Aberdeen Asset Management, now part of Aberdeen Standard Investments. We believe this fund fills a large gap in the income space within the Irish market.
So Mike, why should advisers consider the Diversified Income Fund for their clients?
Mike Brooks: The fund is diversified across a very wide range of asset classes. This gives three key benefits for investors:
- Firstly, we can access a far broader range of income-generating asset classes that help us to generate the targeted 4.5% gross annual yield.
- Secondly, this diversification means that this attractive level of income is delivered with significantly lower volatility than equity markets.
- Finally, the fund invests in a range of tangible asset classes that investors can understand, delivering income in a very transparent way.
Alan McCarthy: Thanks Mike. How is this fund different to other multi-asset income funds in the Irish market?
Mike Brooks: The vast majority of multi-asset income funds focus heavily in traditional asset classes like equities, corporate bonds and government bonds. Our approach is very different as it benefits from a far broader range of investments including renewable and social infrastructure, emerging market bonds, social housing and mortgages, alongside traditional asset classes.
This could be particularly beneficial now given the poor outlook for traditional asset classes. This is most obvious with government and corporate bonds which offer extremely low yields. However we also believe that equity markets are placed to deliver significantly lower returns over the next 5-10 years than they have done historically.
So now more than ever there is a strong need to diversify, a need to invest in alternative asset classes that can help to produce the return that investors need. The broad diversification within this fund helps with this.
Alan McCarthy: You’ve mentioned a number of alternative asset classes that the fund invests in. Can you give me some examples?
Mike Brooks: One good example within the portfolio is Social Housing. This is a growing area with attractive returns and strong diversification benefits. Like Ireland, the UK is suffering from a severe housing shortage. There are a number of specialist investment companies recently launched in the UK that help to address this need by owning and managing a number of social housing properties. This sector benefits from long-dated, inflation-linked cash flows sourced from the government.
Renewable infrastructure is another great example. We invest in companies that own a number of wind and solar farms which benefit from long-dated revenue streams, partly from government subsidies and partly from selling power to power companies. This actually includes a number of windfarms in counties Clare and Cork. Renewable infrastructure has low economic exposure and is a growing area given the focus on green energy by most governments.
There’s quite a number of interesting stories within the fund that investors can explore.
Alan McCarthy: As with any investment, clients invest to generate a positive return, but are also conscious of risk. Can you explain what downside protection that exists in the fund?
Mike Brooks: The key factor behind the smooth returns that we have delivered to our clients is the genuine diversification across a range of different asset classes. All investments come with risks but our exposure to the macro-economic risks driving equity markets is relatively modest. Hence when equities have fallen by double digit amounts, Aberdeen’s growth and income funds have tended to produce low single digit losses.
Alan McCarthy: How will you ensure the fund delivers its gross annual yield target of 4.5%?
Mike Brooks: The Diversified Assets Team at Aberdeen Asset Management which I head up has a proven track record of achieving the fund’s objective.
We are heavily focused on delivering the targeted yield and currently have a portfolio yield that is comfortably in excess of this target. The fact that this comes from a broad range of sources means that it is resilient to changing market conditions and it’s not sensitive to large companies cutting dividends or to troubles in the high yield market. The other key benefit of this broad opportunity set is the ability to take advantage of changing market conditions to deliver the best yield and total return for our investors.
Alan McCarthy: Thanks Mike. You can find out more about the Diversified Income Fund by speaking to your Standard Life Business Manager.
