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Premier seeks alternatives to boost income

Premier’s multi-asset team is focusing on alternatives to UK equity income funds as a source of income for its multi-asset distribution fund.

Of the fund’s 54 per cent equity exposure, around 25 per cent is invested in UK equity income funds, which is its lowest-ever weighting.

UK equity income funds have fallen out of favour with Premier because the UK stockmarket is highly concentrated, which makes it difficult for UK equity income portfolios to provide diversity.

They focus on utilities, pharmaceuticals and telecommunications and dividends are coming under pressure in the recessionary environment. This has prompted Premier to diversify equity exposure through structured products and convertibles.

Structured products comprise 20 per cent of Premier’s multi-asset distribution fund. Premier says they can produce high returns in sideways’ markets and can take a lot of pain on the downside.

It has picked up some distressed structured products which are trading at discounts and is also holding a small amount of convertibles, where prices have been depressed by market sentiment.

Premier says it does not need to venture into high-yield corporate bonds as high yields are available from lower-risk investment-grade bonds.

Fund manager David Hambidge says income distribution drives the focus of the multi-asset distribution fund, which meant capital was sacrificed when the credit crunch caused the correlation of assets to converge.

“If we had gone into cash and government bonds, it would have destroyed the income. We could not cut the income as investors want natural income coming off the portfolio but we have now reached calmer waters. We are committed to paying an income and participating in the recovery of assets hit by forced selling,” he says.

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