Most funds take a balanced approach to portfolio building, but some invest exclusively in equities and a few focus on bonds.
It seems that these days everyone is looking for yield. So it's no surprise that a search for monthly income funds on the Globe Investor website generated 303 hits. Every major mutual fund and ETF company wants to be on this bandwagon.
The problem for investors is that there is no definition of what a monthly income fund actually is. We can assume from the name that it makes regular payments, usually monthly but sometimes quarterly. Beyond that, nothing should be taken for granted. Most funds take a balanced approach to portfolio building, but some invest exclusively in equities and a few focus on bonds. That means risk levels vary significantly from one fund to another.
So do returns. My search turned up several funds with a three-year average annual compound rate of return of more than 10 per cent for the period to Aug. 31. I also found some that averaged less than 4 per cent. The worst result was turned in by the Front Street Balanced Monthly Income Fund (B units), which generated an average annual gain of less than 1 per cent over that time. Its five-year average is in negative territory.
Over all, I found the best-performing monthly income funds at present specialize in U.S. securities, with a couple of global funds close behind. Funds that focused mainly on Canada trailed well behind.
Here are details on one U.S. fund that stood out in my search. All performance results are to Aug. 31. Prices are as of the close on Sept. 29.
Sentry U.S. Monthly Income Fund
Portfolio composition: Balanced
Series: A
Price per unit: $13.67
Distribution: $0.0375 a month
Yield: 3.29 per cent
One-year return: 6.49 per cent
Three-year average ann. return: 14.78 per cent
Risk: Medium
MER: 2.26 per cent
Assets: $205.8-million
Comments: This fund invests in a balanced portfolio that consists mainly of U.S. stocks and bonds. However, there is some Canadian exposure (6.62 per cent) as well as some scattered overseas holdings. The asset mix as of Aug. 31 was 67-per-cent stocks and 33-per-cent bonds.
The equity side of the portfolio is rather unusual for a monthly income fund. The top holding (4.64 per cent of assets) is Alphabet Inc. (Google), a stock that pays no dividends. The second-largest position, wholesale distributor McKesson Corp. (4.24 per cent), has a yield of just 0.7 per cent. There are several other stocks on the top 10 list that have below-average yields. It appears that to maintain the current yield, the managers are using a combination of dividends and capital gains.
The company rates the risk level at low to medium, and so far it's meeting that standard. The worst 12-month performance was a loss of only 0.66 per cent in the year ended Feb. 29, 2016. However, the fund has only been operating since March, 2013, so we don't have a lot of history to work with. I feel the composition of the portfolio suggests investors should be a little more cautious in their risk assessment. I classify it as medium.
The MER is about average for a fund of this type, and the minimum initial investment is only $500. A load charge applies, but many dealers will waive it to get your business.
Ask your financial adviser if this fund is suitable for your needs.
Gordon Pape