Dividend recovery gathering pace for our income fund portfolios

Our income fund picks have outperformed our growth portfolios in May and over the past three months. 

There has been a reversal of fortunes for our two income model portfolios of late, amid hopes the dividend drought is over and a recovery is gathering pace.

The two income portfolios, ii Active Income and ii Low-Cost Income, outperformed the three growth-focused portfolios in May, and over the past three months. Over six months ii Active Income is the best performer of our five portfolios. 

Over one year both income models lag the growth portfolios, but have been closing the gap. At the end of 2020 the one-year performance figure for ii Active Income was -4.2%, but the portfolio is now showing a gain of 21.2% for one year. ii Low-Cost Income was down 7.3% over one year to 31 December 2020, but is now up 16.9% over one year to 31 May 2021.  

Below we run through the fund winners and losers in May for all five of our models, including detailing how each portfolio performed. All performance figures are total return, the share price total return in respect of investment trusts.

No changes have been made (including no rebalancing) to the five models this month.

• Your guide to interactive investor’s five Model Portfolios 

Why income models are in recovery mode

The vaccine rollout has given businesses confidence that all Covid-19 restrictions will soon be lifted. Increasing levels of optimism is reflected by the resurgence in income-paying shares returning to the dividend register.

In the first quarter of the year figures from Link, which keeps tabs on the amount of dividends firms pay, showed that half of UK companies either increased, re-started or held their dividends steady in the first quarter of this year, compared to just one-third in in the fourth quarter of 2020.

Overseas the dividend outlook is also improving, with companies across various sectors restarting their dividends following suspensions during the pandemic.

With dividends returning share prices have moved upwards, and in turn boosted the performance of funds, investment trusts, index funds and exchange-traded funds (ETFs) that have an income focus.

• Are investment trust dividend heroes running out of runway? 
• Outlook for income seekers in 2021 improves as dividend cuts slow
• The power of reinvesting dividends explained

How our two income models fared in May, plus best and worst fund performers 

ii Active Income and ii Low-Cost Income posted small positive returns in May, of 0.8% and 0.5%.

In ii Active Income it was BMO Commercial Property Trust (LSE:BCPT) that was the biggest contributor to performance, returning 11.8%. It has been a rollercoaster 15 months for the trust. In the first quarter of 2020 its share price fell 35% and its discount to its net asset value (NAV) widened out to over 50%. This was in response to national lockdowns, which negatively impacted its property holdings, which include offices and retailers.

Its share price remains below its pre-pandemic sell-off level – it was trading at 108p per share on 21 February 2020 and is currently trading at 92p – but the share price has been climbing over the past six months or so amid expectations the outlook for property is brightening as lockdown restrictions ease. Its monthly dividend is 0.35 pence a share, compared to 0.5 pence per share pre-pandemic. Its discount has narrowed to 22%. There’s scope for this to reduce further as the board told the market in late May following a sale of one of its holdings that “priority will be given to using sales proceeds to buy-back shares in the company if the high level of discount persists.”

Utilico Emerging Markets (LSE:UEM) was the second-best performer in ii Active Income in May, returning 3.7%. Over the past six months performance has impressed, with the trust the second-best performer in its 15-trust sector, returning 15%. The best performer over that timeframe is Mobius Investment Trust (LSE:MMIT), which is not in ii Active Income but is in interactive investor’s Super 60 list.

Also of note was that the two UK income funds in ii Active Income had another positive month. Man GLG Income returned 2.5%, while City of London investment trust (LSE:CTY) was up 1.4%.

At the other end of the table Standard Life Private Equity (LSE:SLPE) was the worst-performer in May, losing 6.3%. Elsewhere, there were small losses for Murray International (LSE:MYI), Morgan Stanley Global Brands Equity Income and Bankers (LSE:BNKR). 

Our passive income model - ii Low-Cost Income - had its performance driven by Vanguard FTSE All World High Dividend Yield ETF (LSE:VHYL), Vanguard FTSE UK Equity Income Index and SPDR® S&P UK Dividend Aristocrats ETF (LSE:UKDV). Each ETF returned over 1% during the month. Returns for the rest of the portfolio were flat, with the only loss from WisdomTree Global Equity Dividend Growth ETF (LSE:GGRG), which fell by 0.3%.

How the income portfolios are performing 

Notes *as at 31 May 2021. Portfolio launch date (for monitoring purposes) was 1 January 2019, except Ethical Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct. 

How our growth portfolios fared in May, plus best and worst performers

It was a case of small losses all round for our three growth models in May. ii Ethical Growth was the worst performer, down 1.9%, followed by ii Active Growth and ii Low-Cost Growth with respective losses of 1.3% and 0.5%.

The performance of ii Ethical Growth has been strong since launch on 1 October 2019, with a return of 30.6%. Over this time period only ii Active Growth has slightly outpaced it, up 33.1%. Over the same time period the passive portfolio ii Low-Cost Growth has gained 16.5%.

But over shorter time periods of one month, three months and six months a notable gap is opening up with ii Ethical Growth in last place. It is also behind both income models over those time periods.

The main reason why returns have cooled over the short term is due to the outperformance of value shares, which tend to be cyclical businesses, since last November’s vaccine announcements. Given that ethical funds tend to be underweight, or completely avoid certain cyclical sectors on ethical grounds, such as big oil and mining companies, this has proved to be a headwind. 

Just three of the 10 constituents in ii Ethical Growth produced positive returns in May: Royal London Sustainable Leaders, Stewart Investors Global Emerging Markets Sustainability and Rathbone Ethical Bond, with returns of 2.4%, 1% and 0.1%. The worst performer was Syncona (LSE:SYNC), which lost 10.7%.

In ii Active Growth the cautiously invested Capital Gearing investment trust (LSE:CGT) was the best-performer in May, up 0.8%. The trust’s annual results, published in May, showed that it had successfully protected investor capital during last year’s Covid-19 sell-off.  The maximum fall of its underlying investments during the sell-off was limited to just 1.5%.

Standard Life Private Equity (LSE:SLPE) brings up the rear, down 6.3%. But the worst contributor to performance across the month, due to its higher percentage weighting in the portfolio, is Scottish Mortgage (LSE:SMT). The trust fell by 5% in May. 

Finally, for ii Low-Cost Growth the two UK passive picks and WisdomTree Enhanced Commodity ETF (LSE:WCOB) were the biggest contributors to performance. Fidelity Index UK and Vanguard FTSE 250 ETF (LSE:VMID) returned 1.7% and 0.8%, while our commodity play was up 1.4%.

The rest of the returns were largely flat. The worst three performers lost over 1%: Vanguard Global Small-Cap Index, L&G Global 100 Index and Fidelity Index Emerging Markets.

How our growth portfolios are performing 

Notes *as at 31 May 2021. Portfolio launch date (for monitoring purposes) was 1 January 2019, except **Ethical Growth portfolio, launched 1 October 2019. Data source: Morningstar Direct.