Interest rates might be inching higher, but until the
Federal Reserve starts tightening the money supply, there will be arguments that creative income strategies such as the Sextant Global High Income Fund (SGHIX) still have an important spot at the investing table.
The fund, launched 18 months ago by Saturna Capital Corp., is designed to generate income while showing the potential to diversify the risk of a rising-rate environment.
Portfolio manager John Scott is afforded tremendous flexibility to essentially go anywhere in the world to build a portfolio that is mostly about providing income. To that end, the portfolio loosely targets a balance of
dividend-paying stocks and higher-yielding bonds.
Mr. Scott said the current allocation is roughly 50% common stock, 10% preferred stock, 30% bonds and 10% cash.
“The optimal income we will generate will be about 11%, including 8% current income and 2% to 3% from capital gains,” he said. “However, under the current market conditions, our income has been at 6.5% this year.”
With the yield on the 10-year Treasury bond at 2.6%, a 6.5% rate of income is nothing to sneeze at. But it does represent a shortfall in Mr. Scott's target and a potential glitch in the formula.
“We are happy with the income stream so far, but what hurt us is the amount of bonds that got called away, which meant we constantly had to reinvest into bonds with lower yields,” he said. “The fact is, most corporate junk bonds are callable and until recently, that has been hurting us, but that's the cost of playing the game.”
Saturna Capital has $4 billion under management, but only 5% of that is in fixed income, and Mr. Scott said this fund is the firm's first move into the junk bond market.
If Mr. Scott is learning on the fly, he does appear to be catching on quickly, which is illustrated by the 10% cash position that will be put to work on a deliberate basis.
On the equity side of the portfolio, 45% of the assets are invested outside the United States, mostly in Europe, where Mr. Scott is finding attractively priced
dividend-paying stocks.
“We have the flexibility to go where the yield is, which is different from a lot of high-income funds that tend to have restrictions on the types of securities they can own,” he said. “We will try to keep it at a 50% stock and 50% bond mix, but that's not a hard and fast rule.”
Although still essentially untested, this particular income fund has a potential benefit in that it has the flexibility to lean heavily on equities in a rising-interest- rate environment, thus avoiding the kind of pain that most bond funds will be forced to inflict on shareholders.
