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  • FIRST POST
    • sixpence.
    • By sixpence. 14th Apr 18, 8:39 PM
    • 138Posts
    • 31Thanks
    sixpence.
    What's wrong with this picture (fund)
    • #1
    • 14th Apr 18, 8:39 PM
    What's wrong with this picture (fund) 14th Apr 18 at 8:39 PM
    Hello hello

    I've been doing some research into getting an income portfolio together. I'm new to researching funds and have been researching this one. It will either be the only fund I am invested in, or the core multi-asset fund in what I intend to be a diverse medium-risk portfolio.

    http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/k/kames-diversified-monthly-income-class-b-income

    I've read through the reports/prospectus and can't find anything wrong with it.

    My only issue is: I am looking for a fund which invests in equities with strong balance sheets. However I couldn't find this information in the prospectus, fact sheets or reports so I emailed Kames to ask about this and they said:

    "We are not able to provide further details of our funds to private investors due to regulations unfortunately which you will find with all asset managers unless they also have a wealth management arm."

    Here are my questions for the MSE community:

    1. Should I use an IFA to get this information? (they seem to be saying that they would give this information to an IFA)
    2. What's wrong with this fund? I can't find anything but am I overlooking something big?

    Thanks
    Last edited by sixpence.; 14-04-2018 at 8:42 PM.
Page 1
    • greatkingrat
    • By greatkingrat 14th Apr 18, 9:13 PM
    • 131 Posts
    • 123 Thanks
    greatkingrat
    • #2
    • 14th Apr 18, 9:13 PM
    • #2
    • 14th Apr 18, 9:13 PM
    What do you mean by a "strong" balance sheet? What you might consider to be strong might be different to what a fund manager considers to be strong.

    I'm not aware of any funds that deliberately try and buy companies with weak balance sheets, so I am not sure your criteria is particularly useful anyway.
    • AnotherJoe
    • By AnotherJoe 14th Apr 18, 9:49 PM
    • 10,988 Posts
    • 12,684 Thanks
    AnotherJoe
    • #3
    • 14th Apr 18, 9:49 PM
    • #3
    • 14th Apr 18, 9:49 PM
    Why not look at the top ten holdings and see if they meet your criteria?
    • ColdIron
    • By ColdIron 14th Apr 18, 10:03 PM
    • 4,722 Posts
    • 6,164 Thanks
    ColdIron
    • #4
    • 14th Apr 18, 10:03 PM
    • #4
    • 14th Apr 18, 10:03 PM
    Nothing wrong with it as long as it meets your objectives. Fees are reasonable for an actively managed fund of this sort. The yield is higher than average so don't expect much in the way of capital growth particularly as the fees are taken from capital, common in higher yielding funds. It's only wrong if it's wrong for you
    • bowlhead99
    • By bowlhead99 15th Apr 18, 11:56 AM
    • 8,282 Posts
    • 15,134 Thanks
    bowlhead99
    • #5
    • 15th Apr 18, 11:56 AM
    • #5
    • 15th Apr 18, 11:56 AM
    I've read through the reports/prospectus and can't find anything wrong with it.

    My only issue is: I am looking for a fund which invests in equities with strong balance sheets.
    Originally posted by sixpence.
    As you'll be aware from Kames's March factsheet, under a third of the portfolio is invested in conventional corporate equities (with one third of that, being UK). The rest of it is split between bonds (both corporate and government), real estate vehicles, a bit of cash, and specialist income holdings (e.g. infrastructure businesses such as HICL or Ferrovial).

    Within the bonds (38% of the portfolio), over half of them by value are rated BB or below. BB itself is below 'investment grade' which would start at one notch higher on the rating scale. Investment grade are considered by the ratings agencies to have high enough likelihood of paying out to be safely investible by banks. Anything that doesn't qualify as 'investment grade' is known as 'high yield' or, affectionately, 'junk'.

    BB is the highest 'non investment grade' you can get - the safest of the various tiers of high yield/ junk bonds - but indicates a higher level of concern that deteriorating economic conditions and/or company-specific developments could hinder the issuer's ability to meet its obligations.

    This particular fund at end of March also had just as much invested to B bonds as it did in BB. B-rated bonds can meet their current financial commitments, but their future outlook is more vulnerable to adverse developments. Whereas the percent of the Kames fund allocated to CCC bonds are, according to S&P, already vulnerable right now and "dependent on favorable business, financial and economic conditions to meet financial commitments". There's also a few percent allocated to unrated bonds. A bond not rated is not necessarily unsafe, because it hasn't been rated unsafe, but it hasn't been rated at all, so may be from a newer issuer or smaller player who isn't going to spend the money to get rated because it can find someone to lend to it without doing so.

    Clearly, you are not going to get a 5% ongoing level of income from a portfolio of equities, bonds, property and real estate in an environment where risk free cash pays 0.5-1%, without taking some risk and holding assets with weaker balance sheets. If something is returning 5% on its value, that's because people in the stock market demand an income return as high as 5% to compensate them for the risk of not getting paid out (including the risk that market interest rates rise and leave that risky investment looking even less attractive and lower valued causing them a loss).

    You mention you have read the prospectus and all the reports and can't find out if the companies in which it invests have strong balance sheets. Such a question is subjective anyway. But if you know what you mean by 'strong' you could take a look at the complete list of holdings in the last annual report and/or interim report and decide for yourself if they are the types of holdings you want. For example, the last interim report for their UK OEIC is at https://www.kamescapital.com/WorkArea/DownloadAsset.aspx?id=4294974803 and within that, the report for Kames Diversified Monthly Income Fund starts at page 161 (162 of the pdf). The list of holdings as at 31Jan 2018 is a couple of pages later.

    When you look down the list, you can see what they held. Do you consider the governments of Australia, Malaysia, USA, Indonesia, to have strong balance sheets? How about Direct Line Insurance, or Volkswagen Finance, Bupa Finance, Ocado? Danske Bank or Swedbank? Or Shell, or Rio Tinto, Aviva, Reynolds or Imperial Brands? Tritax Big Box REIT, 3i Infrastructure, John Laing Infrastructure, IPP, HICL, NextEnergy Solar Fund or National Grid? What about Taiwan Semiconductor or MGM Resorts or AT&T, Verizon or Zhejiang Expressway? They were all in the mix at the date of the report. Kames are employed to be an active manager, and will change the portfolio as they see fit. It is easier to let them get on with it rather than build something yourself.

    From their report:
    Attractive and dependable levels of income are increasingly sought after. We believe that a diverse multi-asset portfolio can deliver our income target, capital growth and risk management through dynamic asset allocation and high-conviction stock selection.
    As the safest strongest companies in the world will pay the lowest rates of interest on their bonds, and may not pay particularly high dividends because they have other great uses for the profits (or simply, their investors don't demand high income), one would not expect that the investments held by a fund designed to pay a high level of ongoing income will exclusively invest in companies with 'strong balance sheets'. They invest in a whole range of stuff, which is what multi-asset investing to produce diversified income is all about. The clue is in the name of the fund

    1. Should I use an IFA to get this information? (they seem to be saying that they would give this information to an IFA)
    The 'this information' being 'does it invest in companies with strong balance sheets'?

    The answer that would come back would be that they have a mix of holdings consistent with trying to get a high income yield: some relatively stronger, some relatively weaker, some of the holdings are not in 'companies' at all, they are e.g. the Argentinian or Turkish or Australian governments and so on.

    If you are the IFA's advised client and he recommends the fund to you, he can probably tell you more about it. If you are the IFA's client and he doesn't recommend the fund to you and recommends something else, but you think you know better than him so you ask him why this one was less favoured for your objectives , he might be able to look into it and tell you why he doesn't want to use it. Obviously, it will cost you some money to be the IFA's advised client in the first place.

    If you are not the IFA's client, and you approach him and say "I want to find out about the fund, please can you find for me the information that the manager won't release to me because they haven't prepared information on this subjective topic in a format suitable for release to non-advised investors, so please go and try to find for me the raw information and put it into your own words with your own subjective views around it in a way that is suitable for release to a newbie DIY investor, and then release it to me so I can use my own judgement to evaluate the fund on a 'DIY' basis, even though as far as you know I am a newbie investor and may not have the level of knowledge to sensibly interpret the information you give me...". Then I expect he won't want that type of business which from his end comes loaded with far more potential risk than reward.

    So no, I don't recommend you use an IFA to simply try to get you information about a fund that the fund manager has not authorised for release to you, but you could of course use an IFA to advise you what funds are suitable for your objectives and ask him specifically about this one when you do it.
    2. What's wrong with this fund? I can't find anything but am I overlooking something big?
    I don't have an opinion on that as I'm not looking for diversified monthly income so have not researched the fund in any detail.

    Some people seeking income would very much like the concept (of not having to build their own portfolio of high yield / investment grade / strategic bond funds, property funds, infrastructure funds and equity income funds themselves), and just pay someone like Kames to build it and maintain it. Others would approach their need for income in a different way, simply being concerned with total return across the portfolio and taking a mixture of natural income and capital gains to meet their ongoing needs.
    Last edited by bowlhead99; 15-04-2018 at 12:04 PM. Reason: typo/ formatting
    • sixpence.
    • By sixpence. 16th Apr 18, 7:21 PM
    • 138 Posts
    • 31 Thanks
    sixpence.
    • #6
    • 16th Apr 18, 7:21 PM
    • #6
    • 16th Apr 18, 7:21 PM
    Thanks so much for your responses everyone. They are really appreciated.

    For the record: I consider a strong balance sheet to be a company that has a greater number of assets and cash than liabilities and debt

    Bowlhead - In particular, thanks for giving such a detailed response. I would much rather pay someone like Kames to manage my diversification for me, which is why I'm looking into this. Your comments are helpful and I will be coming back to this page to look at them.

    I am going to check out the top ten equity holdings and see if they look good from my perspective (as seen above). I feel like that's an easy way to look into this.

    ColdIron - I think this is the right type of fund for me. I am simply worried that I might be overlooking some kind of glaring mistake that will make this a silly investment. Maybe I sound paranoid but I am quite new to this and still learning a lot as I go.
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