James Gard: Welcome to Morningstar. With me today is John Stopford. He is the Portfolio Manager at the Ninety One Diversified Income Fund.
Welcome, John. Can you give us just an idea of what the fund does for our viewers, please?
John Stopford: So, the fund is looking to deliver a defensive total return driven primarily by income from the underlying securities. We buy what we think are resilient yielding securities, and we look to run that with a low level of risk, and ideally, we look to protect the downside in times of market stress.
Gard: Great. And can you explain how a sort of multi-asset fund would work to our viewers? It's a very popular type of fund but maybe less understood than most.
Stopford: Well, we're quite different, I think, from a typical multi-asset fund. They tend to be making big asset allocation calls across different asset classes. What we're looking to do is identify from a very big global multi-asset universe individual securities from which we can build a portfolio where they're delivering yield in a reliable way, income in a reliable way, and we can combine them to deliver a low volatility total return.
Gard: Sure. Thanks very much. So, I mean, obviously, these are very volatile times for U.K. bond markets. How do you navigate this sort of bout of volatility that we're having now?
Stopford: Well, it's been a pretty challenging world for everything. I think the U.K. is currently in the crosshairs of markets, but everything else has sold off pretty dramatically this year. For us, we're looking globally. So, we can look for opportunities outside the U.K. and hedge currency risk back to Sterling and try and limit volatility. So, our playing field is much wider, and so we're less exposed, and we've actually deliberately avoided a lot of U.K. risk simply because there are a lot of uncertainties associated with the U.K. economy at the moment.
Gard: Sure. I mean, would there be a point where the U.K. government bonds become cheaper and attractive as a result or…?
Stopford: Well, they are certainly becoming cheaper. At the moment, we're more focused on markets that we think are in control of their monetary policy and where we're closer to peak rates, so places like Canada, Australia and New Zealand. But yes, at some point, U.K. yields will price in enough bad news and enough interest rate hikes, and at that point, they could be a pretty compelling investment.
Gard: Super. Thanks. And we're talking about inflation. I mean, it's just a sort of high inflation environment. Does it mean you have to take a different approach to yield? Or would you just maintain the same approach?
Stopford: I think you have to think about real yields. You have to think about where you're being compensated for inflation, whether the assets you hold can pass prices through and be relatively protected. So, yes, we want a yield that over time actually gives people an inflation-adjusted return, and at the moment, we think a yield of around 6% over the medium term, which is broadly where we are, should do it, particularly given the assets that we've chosen.
Gard: That makes sense. Thanks very much. And just as a final question in terms of equity income, are there any particular sectors you think are particularly attractive in terms of income at the moment?
Stopford: Well, I think, a lot of stocks you're beginning to see some pressure. We have seen some pressure from inflation on margins, on earnings, and I think you need to look for companies that have got some capacity to pass prices on where they have brand strength that they can use to raise prices. And yes, I mean, I think you have to be thoughtful about the impact of inflation on the companies you own, and that hopefully is what we've done.
Gard: Super. Well, thanks so much for your insights, John, and thank you for joining me today. For Morningstar, I've been James Gard.
