Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Steve Andrew, Manager of the M&G Episode Income Fund.
Hi, Steve.
Steve Andrew: Hi, Emma.
Wall: So, congratulations. You've recently reached your five-year anniversary of the fund and that five years has been really interesting five years for income investors. I suppose I should start by asking what's changed.
Andrew: Well, thanks very much for the congratulations. Lots of stuff has changed. Generating income was a challenge five years ago. It's still a challenge today. We're lucky in that we are a global multi-asset investor and there are a range of asset types that we can access for that income.
Important for me though is that we don't get too ambitious with our income target and that's been a source of great satisfaction over the past five years is that we haven't had to overstretch where we've seen others maybe with a higher target than our 4% or so, which is where we aim for, finding themselves more and more confined into assets that are getting ever more expensive.
We've still got a good breadth of assets there because the critical point there is we need to actually pick the ones that are going to go up in price. We need to pick the ones that are actually going to generate an investment return. The income itself isn't good enough. We need to get construct for an income but getting the right asset class at the right time has been critical over that five-year period and remains today.
Wall: And who has delivered that for you over the last five years?
Andrew: It has varied and I guess again that's the key. You can't just put the money in a particular asset type and expect it to sit there and work for you. It might do, but if it's at a good price today, you need to keep checking that that price remains and that the prevailing price is still good value. The market can ebb and flow and give you volatility that looks like risk and risk that looks like volatility. So, trying to discern the difference between those two things is essential.
So, for long periods of time we had a very substantial exposure to U.S. 30-year treasuries. We had at one point a fifth of the portfolio in a combination of U.S. and U.K. 30-year bonds and now I've got just 4% in those. So, we've had to be dynamic. They have been very powerful contributors over the years as have U.S. equities and we've run that down as well, as have European equities, less so. The European equity has given us more and more recently, but that's an area that I would still expect to be paying us for owning them over the coming months.
Wall: So, you've mentioned there that cheap ones have come right down to 4%, so what's the other 96% in now? Where are you positioned for income in the future?
Andrew: Well, the consistent allocation that we've had over the course of the past five years has been to be leaning into equities, so observing good equity prices, then scaling our exposure given where the market has been positioning and given crucially the quality of the diversification that we've been able to achieve. So, the diversification that we've been able to achieve, both across the asset classes and within them, has changed over the course of the past few years. Now, we are looking for diversification within equities.
So, within equities we're looking at U.S. banks. We're also looking at Japanese financials both of which have been sold off pretty arbitrarily over the course of the past six months to offer some very compelling investment opportunity. Within fixed income we've broadened out into some of the non-mainstream government bonds.
So, at first, looking at areas like South Africa and Mexico but more recently and I think this is still something that's very important in terms of our asset allocation today is to allocate towards those European sovereign peripheral bonds, so, Italy, Portugal, Spain, both of which operating in a very substantial spread over German government bonds. If it's a sovereign and it's euro-denominated, it shouldn't have a very wide spread over German government bonds. So, there are some great and interesting opportunities still out there.
Wall: Steve, thank you very much.
Andrew: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
