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Total return ‘flawed’ for equity income

Heartwood Wealth Management says separating income performance from growth performance when selecting equity income funds provides a better overview of funds’ risk profiles than just analysing total returns.

The company, which runs discretionary money for IFAs’ clients, says many funds in the equity income sector are ranked according to total returns. However, it believes analysing equity income funds on this basis is flawed because it assumes that any income generated is reinvested in the portfolio.

Heartwood says many clients need income to support themselves rather than reinvesting it, so they need a predictable income stream that can grow ahead of inflation.

Capital preservation is also important to this type of client along with a degree of capital growth. The fund house believes it is best to meet these goals by looking at the growth performance in isolation from income performance although income will take priority.

CF Heartwood pedigree equity income is not restricted to the UK and can invest overseas if fund managers Robert Allinson and Darrell Sykes believe this will help the fund achieve its goals.

Overseas funds comprise 20 to 30 per cent of the portfolio – a range set by Heartwood due to concerns over unreliability of dividends and lack of track record among many overseas managers.

Allinson says: “On a total return basis, some managers do not manage their portfolios with sufficient income stability. Prioritising the income part over the capital part is important. We expect the capital to take care of itself over the long term.”


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