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Mark Dampier: How to get an income now that savings are past the 'use by' date

 

Mark Dampier
Saturday 31 January 2015 01:00 GMT
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The Bank of England is only weeks away from its sixth anniversary of cutting interest rates to a historic low of 0.5 per cent.

It is hard to believe how quickly the time has passed since the rate cut; for retail savers it has been a torrid time. Schemes launched by the UK central bank and the Government, such as Funding for Lending, have caused retail deposit rates to continue to fall over recent years – something that has accelerated quite markedly over the past three years.

The best instant access accounts currently pay around 1.4 per cent gross at a push. For those relying on cash deposits for their income, this is dire. Unfortunately, I cannot see it getting any better in the near term. I have long proposed that interest rates will not rise until after the general election in May this year and it is quite possible we will not see the first increase until 2016.

For those with sufficient capital to invest, I have always been at pains to suggest that relying on one asset class for income alone is dangerous. Cash deposits are a prime example – remember, in 1990 interest rates reached 15 per cent and clearly the drop since has been remarkable. I have always viewed it as important to build the potential for both income and capital growth into a portfolio. Generally, I look to UK equity income funds to do that.

Previously I have highlighted a number of established equity income funds in this column. One with a less familiar name is Majedie, an investment boutique founded in 2002. Traditionally, Majedie has focused on managing money for institutions, so is not well known to retail investors. The investment group has grown steadily over the past decade and it has an experienced management team that has worked together for many years.

Following the success of its UK growth product, the group launched an income portfolio, the Majedie UK Income fund, in December 2011. Since then, the fund has grown by a remarkable 81.6 per cent, against 42.2 per cent for the wider UK stock market and 48.2 per cent for the average fund its sector.

Chris Reid and Yuri Khodjamirian, the fund's managers, will be unknown to most readers, but they have been part of a 15-strong team at Majedie for several years. They run a relatively concentrated portfolio of about 60 stocks, allowing each holding to have a significant impact on performance.

The fund is not wedded to a particular size of company, though it currently has a greater focus on medium-sized businesses to produce much of the income. This means it could dovetail quite well with funds biased towards larger, dividend-paying companies, such as the Artemis Income and Trojan Income funds. It currently yields an attractive 4.1 per cent.

At present, the fund has a bias towards the financial and consumer services sectors with Friends Life, easyJet and Direct Line all large holdings. Sainsbury's is another significant holding – which might come as a surprise to many given that the company has cut its dividend. The fund managers initially purchased the stock at the start of 2014 and have been building this position since.

In retrospect they admit starting this too early, but they believe the supermarket recognises its key problems and could make a comeback. A number of solutions have been devised to help undergo a recovery, including addressing the issue of several underperforming larger stores.

Our own quantitative analysis within the Hargreaves Lansdown research team has shown the fund's managers have added significant value through stock selection throughout their tenure. We have followed Majedie's UK team for several years and our own multi-manager team has invested with the group for some time.

In my view, it is worth taking a closer look at this relatively unknown income fund. It combines several of the attributes we favour: a fund supported by a close-knit team, harnessing years of experience, which is trying to do something a little bit different. With two highly driven fund managers at the helm, this fund is an interesting offering from a well-incentivised and successful UK fund group.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.uk

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