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Issued by 1OAK Capital Limited, authorised and regulated by the Financial Conduct Authority.  1OAK Capital Ltd (1OAK) (Registered in England & Wales Number: 06890293; FCA registration number 501453) provides fund management services for its customers. 1OAK Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered Office of 50 Sloane Avenue London SW3 3DD.

Each of the 1OAK multi-asset risk graded funds has distribution share classes in GBP, USD and EUR that offer a quarterly dividend of 1%, for a 4% annual yield. These share classes have been designed for investors that want a regular income with the chance of capital appreciation.

The Distributing share classes offer several benefits for income-seeking investors:

  • Regular income paid in perpetuity
  • Possibility of rising income
  • Possibility of increasing capital value
  • Diversified investment exposure
  • No exposure to dividend cuts
  • No exposure to falling interest rates
  • No exposure to sequencing risk

A NEW APPROACH TO GENERATING INCOME

Income seeking investors have had a tough time over the last decade. Interest rates have dropped to all-time lows and in many cases are negative. The return on cash is close to zero or even negative. The additional yield available on the highest risk bonds has come down sharply. Many income-seeking investors have turned to equities; however, this has been a risky strategy. The bulk of equity dividends come from a small number of companies, many of whom have recently reduced their dividend payout. The share prices of higher-yielding shares have been volatile and in many cases, investors have suffered large losses. Funds that aim to offer an income have increasingly had to look for more esoteric assets or employ more complicated strategies to generate income demanded. Equity income funds have been among the worst-performing funds. Trustnet recently said in a report “The underperformance of UK equity income strategies in 2020 has been so stark that the best funds in the peer group are still behind the worst performers of almost every other Investment Association sector”1

1OAK multi-asset funds offer a different, but simple approach. The funds hold distributing share classes in each base currency (GBP, USD, EUR). The income is set at 4% per annum of the net asset value of the share class which is paid quarterly. The funds invest on a total return basis. This means that the funds don’t invest in income-generating assets, but instead have exposure to a portfolio of equities, bonds and alternative assets based on what the manager thinks offers the best risk-adjusted return within the risk constraints applicable to each fund. The funds generate income payments by selling some of the assets held. The number of shares in each fund held by an investor will not change before and after the dividend payment, but the NAV will fall immediately after the record date for the dividend payment has been passed.

 

[1] https://www.trustnet.com/news/7466549/how-the-worst-funds-in-almost-every-sector-are-beating-the-best-uk-equity-income-funds-in-2020 

BENEFITS OF DISTRIBUTING SHARE CLASSES

REGULAR INCOME IN PERPETUITY

The principal benefit is that the dividend will be paid every quarter without fail. Every quarter 1% of the value of the fund at the time is distributed as a dividend.

POSSIBILITY OF RISING INCOME AND CAPITAL APPRECIATION

If the fund manages to achieve more than 4% per annum growth, investors will benefit from rising income and capital appreciation. The dividend will increase with the net asset value of the fund. If the value of the assets that the fund holds grows more than 4% per annum, the growth will offset the effect of the regular coupons.

DIVERSIFIED EXPOSURE

Typically funds that target a higher coupon have to invest in assets that offer a higher yield or dividend, leading to a concentrated exposure to specific equities or bonds. These assets can involve significant risks to capital or liquidity.

EXPOSURE TO GROWTH ASSETS

High yield portfolios struggle to gain exposure to the high growth assets like Apple, Alphabet, Facebook and Amazon that have been the drivers of performance over the last few years. The 1OAK multi-asset funds can maintain a diversified investment strategy that is managed to meet the needs of investors with a lower, medium or higher attitude to risk.

NO EXPOSURE TO DIVIDEND CUTS OR DEFAULTS

Income funds that invest in high yield equities and bonds are vulnerable to cuts in the dividends that are paid, defaults and falling rates. Exposure risk to dividends cuts has become more prominent due to the significance of the dividends paid by a small percentage of companies to the overall total dividends paid.

NO SEQUENCING RISK

Sequencing risk is a problem that has been identified for investors that are selling down their portfolio to generate a fixed income. In summary, this is where investors can run out of money or deplete the value of their portfolio faster than anticipated if the value of the portfolio falls in the early stages. The 1OAK multi-asset funds eliminate this risk by distributing a percentage of the current value rather than a fixed amount.

4% WITHDRAWAL RATE

The way that the fund generates the income is like a decumulation strategy that is based on redeeming a fixed percentage of the remaining investors' portfolio. This is a strategy that has widespread academic support. The Investment Association compared various strategies and concluded that the strategy benefits from simplicity, it eliminates the risks of running out of money and if the income is set prudently, it offers a good prospect of preserving or growing the capital value.

Examples

The following charts are intended to illustrate how the fund may perform over time. The charts are not forecasting or projections. The charts show how the performance of the A (Accumulation) and D (Distribution) shares may evolve over time. The only difference between the A and D performance is because of the payments of the dividends. The charts also show the dividend payments (right-hand scale).

The table below shows the sum and average values for dividends received over the 10-year period.

 

Initial Share Price

A Shares: 1,000

D Shares: 1,000

Volatility

7% per annum

Dividend

1% of NAV per quarter

Average Growth

5% per annum

GROWTH IN LINE WITH AVERAGE

distribution graph

 

GBP Value

Percentage of Initial Investment

Underlying Growth

 

5.0%

Final Value

     1,087.29

 

Total Dividend Payments

          453.2

45.3%

Average Dividend

            11.3

1.1%

Max Dividend

            12.3

1.2%

Min Dividend

            10.4

1.0%

In this first example, the realised growth is 5.0% over the ten year period, in line with the average used in the simulation. The income received is 11.3 per quarter on average, 1.1% of the initial value. The income varies between 10.4 per quarter (1.0% of the initial value) and 11.3 (1.1% of the initial value). The final value of the D shares is 1,087.29. Broadly the fund has offered a steady income and maintained the capital value over time.

GROWTH ABOVE AVERAGE

distribution graph2

 

GBP Value

Percentage of Initial Investment

Underlying Growth

 

7.3%

Final Value

     1,358.01

 

Total Dividend Payments

          489.5

49.0%

Average Dividend

            12.2

1.2%

Max Dividend

            13.7

1.4%

Min Dividend

            10.4

1.0%

Better than average growth results in a rising income and increased capital value. In this example, the fund rises steadily over the period. The A shares realise a return of 7.3% per annum. The dividend paid vary between 10.4 and 12.2, averaging 12.2. The price of the D class increases to 1,358. The fund would have delivered a rising oncome and capital appreciation.

GROWTH BELOW AVERAGE

distribution graph 3

 

GBP Value

Percentage of Initial Investment

Underlying Growth

 

-0.5%

Final Value

        635.43

 

Total Dividend Payments

          333.2

33.3%

Average Dividend

              8.3

0.8%

Max Dividend

              9.6

1.0%

Min Dividend

              6.4

0.6%

Even when investment performance is negative the fund offers a quarterly dividend. However below average growth results in a loss of capital and a reduction in the income paid out. Over the 10-years, the price of the A shares falls to 949.86, a return of -0.5% per annum. The final value of the D shares is 635.43. Investors will have received dividends totaling 333.2. The dividend received ranges from 9.6 to 6.4, averaging 8.3.

HIGH VOLATILITY; FALLING THEN RISING

distribution graph4

 

GBP Value

Percentage of Initial Investment

Underlying Growth

 

7.3%

Final Value

     1,351.74

 

Total Dividend Payments

          434.8

43.5%

Average Dividend

            10.9

1.1%

Max Dividend

            17.1

1.7%

Min Dividend

              5.3

0.5%

Sequencing risk has been correctly identified as a significant risk for investors who are decumulating. Large falls in the value of the investor’s portfolio at the start of the decumulation period can have a material impact on the income investors receive. The scenario above illustrates how the dividend paid suffers when the fund value falls, but recovers as the fund value recovers. The income paid in the latter years is unaffected by the initial fall in value.

In this example, the fund value almost halves over the 1st year. The A shares drop to 550.4. The dividend paid by the D shares drops to 5.3. However as the fund performance recovers, the value of the D shares and the income paid rise as well.

RISKS

As with any investment, there are risks.

The fund holds a diversified portfolio of equities and bonds. The value of the portfolio will vary from day to day. The value of the underlying assets will rise and fall over time.

The income investors receive will vary. The income will rise and fall with the performance of the fund. If the value of the fund rises by less than 4% per annum, the effect of paying the dividends will cause the value of the fund to fall - reducing future income payments and the capital value of the fund.

If the value of the underlying assets were to fall, the payments of dividends by the fund will exacerbate this fall. The value of the fund and future dividend payments will fall further.

BENEFITS

RISKS

Regular quarterly income

Variable income

Possibility of rising income

Capital value may fall

Possibility of capital growth

Absolute / real income may fall

Range of risk graded income funds

Dividend payments will exacerbate any fall in the capital value of the fund.

No exposure to dividend cuts or falling rates

 

The investment strategy focuses on total return

 

No sequencing risk

 

CONCLUSIONS

The distributing share classes of the 1OAK multi-asset funds offer an attractive option for income-seeking investors. The value of the fund and dividends will vary, but there is the possibility that both will increase over time.

Download: 1OAK Multi-Asset Income