Questor: time for a deeper portfolio spring clean to make our income more resilient

Last week we made radical changes to our Income Portfolio when we replaced five stocks. But there is more to do.

Our addition of three property investment trusts last week has given us significant exposure to real estate, especially as we already had two such trusts in Standard Life Investments Property Income and Regional Reit.

We have taken a look at the likely sustainability of the income produced by those two trusts. We are fairly comfortable about Regional, as we reported two weeks ago. But Standard Life Property Income is another matter.

Although the trust has relatively little exposure to retail property, which has weighed on other trusts thanks to the decline of the high street and shopping centres, we are concerned about how its office buildings will perform even after the end of the lockdown.

A prolonged recession, which many regard as inevitable, would in any circumstances affect demand for offices. But the effect is likely to be exacerbated this time by a reluctance on the part of some people to return to traditional ways of working, either because of lingering worries about crowded places while memories of the virus are strong or because they’ve decided they are happy to work from home.

Employers may make the choice for them by asking them to work remotely. Some could even shut their offices entirely.

We will therefore sell the Standard Life trust. In view of the heavy exposure to real estate we now have we won’t replace it with another property fund but instead have decided to add a little international diversification to the portfolio in the shape of Murray International. This is not crystallising a loss because the two trusts have fallen by almost identical amounts (about 24pc) over the past three months. We are, if you like, selling low to buy low.

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But Murray International’s current yield is 5.7pc whereas the Standard Life fund’s is 6.5pc, so this switch will reduce our income if both maintain their divis at current levels. In practice we fear a cut from Standard Life Property Income.

Murray International has 30pc of its money in the Asia-Pacific region, followed by 18pc in North America and 15pc in Latin America and emerging markets. It is managed by the highly respected and experienced Bruce Stout of Aberdeen Standard Investments and, despite its income remit, adopts a “quality growth” investment style.

A key requirement now, when dividends everywhere are under threat, is that a trust has reserves with which to maintain its own dividend if those from its holdings fall short. Murray has 58.5p per share, which is equivalent to 109pc of its last full-year payment.

Although we sold half of our individual stocks last week we have decided to retain some exposure to the London stock market via diversified investment trusts. Again we want trusts that have generous reserves and in this respect one of our two existing generalist trusts makes the grade and one falls short.

Schroder Income Growth’s reserves would pay 76pc of a full-year dividend even after the use of the reserves to cover a shortfall in this year’s dividend brought about by a 30pc loss of income and a 3pc rise in the trust’s divi. This is one of the highest figures among the trusts we covered when we wrote about reserves three weeks ago. We will therefore hold on to this trust.

Invesco Income Growth, on the other hand, had a figure of 43pc on the same basis. We will therefore sell this trust and replace it with a rival fund that has very generous reserves (88pc on the same basis), namely JP Morgan Claverhouse. Of the two funds the latter has fallen further and yields 5.3pc against the Invesco fund’s 5pc. This change will therefore give our portfolio a small income boost if existing divis are maintained.

Update: Next

The retailer last week resumed online sales, which were halted last month. We are sure that the firm will not only make it through the coronavirus crisis but prosper in the changed high street that will emerge. It is due to publish a trading statement next week and we will update in more detail then. Hold.

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