Diversified income Portfolio (DIP)

What is the DIP?

The DIP is a portfolio which has the investment objective of generating a sustainable level of natural income with the prospect for some capital growth. While the target level of income will remain at 4%, the portfolio is expected to achieve in the region of 5% in the current economic environment.

The portfolio invests predominantly in fixed income securities and equities, in order to produce income and capital growth. The portfolio will invest in a number of geographical regions and sub-sectors within these asset classes. This ensures that the risk associated with income and capital return is diversified and therefore, reduced overall.

Partnership with T. Rowe Price

While Mattioli Woods is the discretionary investment manager for this portfolio, advice regarding asset allocation and fund selection is provided by our strategic partner, T. Rowe Price.

T. Rowe Price launched in 1937 and has been in the UK since 1979, with a London office that now numbers over 800 employees including 162 investment professionals. The company has a total of £1.1 trillion of assets under management globally.

Why income investing?

Dividend yield and dividend growth have been the strongest drivers of equity returns over the long term.  The chart below clearly illustrates just how influential income has been across a number of developed markets over a 10-year time period.

Graph

Date: 10 years to 29/02/2024
Pricing Spread: Bid-Bid ● Data Frequency: Daily ● Currency: Pounds Sterling
Source: FE Analytics

 

There are a number of reasons why income investing within equities has been so advantageous over the longer term:

  • • income investing can identify well managed and profitable businesses
  • • sustainable income has the potential to lead to greater stability of returns
  • • income investing can offer a hedge against inflation over the longer term
  • • in a falling market, income investing can benefit from ‘pound cost averaging’*
  • • income investing can identify companies that have value characteristics

* Pound cost averaging is an investment strategy where an investor regularly invests a fixed amount of money into a particular asset or investment fund at predetermined intervals, regardless of the asset's current price. This approach allows the investor to buy more units of the asset when prices are low and fewer units when prices are high, thereby potentially reducing the average cost per unit over time. Pound cost averaging helps mitigate the impact of short-term market volatility and allows investors to build a diversified portfolio gradually.

Income investing offers a hedge against inflation over the longer term

While equities per se offer inflation protection over the longer term, the growth of dividends paid generally outpaces the inflation rate.  Unlike shorter-term inflation hedges (i.e. inflation-linked bonds) that are poor performers, if the inflation risk being hedged fails to materialise, equities that pay out a sustainable income should capture much of the market upside when inflation is less prevalent, while outperforming when inflation becomes more persistent.  On this basis, equities can be a good long-term hedge against inflation thanks to the dividend-paying proportion carrying the wider equity universe.

Income investing identifies companies that have value characteristics

Companies that distribute a steady income to shareholders typically trade at a discount to the broader market.  This is usually for a number of reasons, both fundamental and behavioural. These cashflow positive businesses are generally mature and ‘ex-growth’ and the market prices a premium to faster growing companies.  The market often also underestimates the benefits of the long-term compounding generated by the steady income by focusing too much on the shorter-term growth outlook.

But…just because income investing has worked in the past, why should it work in the future?

The chart above incorporates a number of economic environments from recession to expansion and illustrates that income investing is the most influential driver of long-term equity returns. 

But just because income investing has worked in the past does not automatically guarantee that it will work going forward.  To quote Mark Twain, “history does not repeat itself, but it often rhymes” and by focusing on income within the Diversified Income Portfolio, we believe we are tilting the balance of probability in our favour to outperform going forward.

What about income investing for the here and now?

Given the rally in US stocks, generally led by a small number of AI-tech orientated names, has that left global equities looking less attractive in the short-term? Yes and no!  In this environment it highlights even more the importance for active management in order to avoid the dangers from over-paying.  But equally, there are many opportunities in companies which are not currently so expensive that have been left behind in this rally.

With inflation remaining ‘higher for longer’ and above the 2% targets set by Central Banks, albeit considerably below the recent highs, income paying stocks should remain attractive as the impact of inflation begins to erode growth prospects in non-cash generative businesses.

Income is once again attractive from fixed interest

Interest rates rose quickly as we moved from an environment of Quantitative Easing (QE) to one of Quantitative Tightening (QT).  With the rises in rates, we saw a resetting of bond yields across the credit spectrum.  Today, yields are attractive and are contributing to both the income generation and total return of the Diversified Income Portfolio.  While we have seen a recent dip in yields since the December 2023 peak, current levels are still attractive and investors were compensated for that dip by a boost to their capital as the yields reduced.  Bond markets are now readjusting their expectations for when rate cuts might commence but the consensus remains that we are at ‘terminal rates’ for this rate cycle.  With many corporates in a strong financial position, credit fundamentals remain supportive.

Conclusion
  • • Income investing captures the proven long-term drivers of equity return in dividends and dividend growth.
  • • Dividends paid from well managed businesses that are generating positive cash flow have quality characteristics – a proven driver of returns
  • • Income investing offers a hedge against inflation over the longer term.
Risk warnings

The value of the underlying investments within the DIP and income generated from these underlying investments can fall as well as rise and you may not get back the amount invested.

For funds investing globally, currency exchange rate fluctuations may have a positive or negative impact on the value of your investments.

Changes in interest rates will affect the value of, and the interest earned from, bonds held by the portfolio (and underlying funds).  When interests rise, the capital value of the fund is likely to fall and vice versa.

Past performance is not a guide to future returns.

Mattioli Woods – our ‘restricted’ status

For over 30 years, Mattioli Woods has been at the forefront of providing advice, pension administration/trusteeship, and investment products and services for clients across the country.  Its key aim is to put clients first to help them reach the objectives they set.  This is done with integrity and professionalism while maintaining a bespoke approach, and it continues with this ethos as part of its culture. 

The Mattioli Woods website (www.mattioliwoods.com) provides a further history of the company and the products offered to achieve clients’ various requirements. 

In terms of financial legislation, firms can be ‘independent’, or ‘restricted’, or both. 

We offer our own discretionary portfolio management (DPM), self-invested personal pension (SIPP), personal pension (MW PP) and small self-administered scheme (SSAS) services, as our investment managers, consultants and client relationship managers are specialists in these areas of advice and management.  For this reason, we are classed as a ‘restricted’ advice business and, only where it is suitable and in line with your objectives, we will recommend these solutions to you.  Should your circumstances not be best served by our own propositions, we will look to the wider market to source the most appropriate solution for you. 

In addition, as part of our centralised investment proposition, we offer the Custodian Property Income REIT plc, which is a real estate investment trust managed by Custodian Capital Limited, part of the Mattioli Woods Group. 

Our solutions are designed to meet your needs and where appropriate we can also offer advice on pensions, investments, and non-investment insurances (protection policies) from the whole market. 

Mattioli Woods is committed to ensuring the principles of ‘treating customers fairly’ set by the FinancialConduct Authority, are applied with integrity throughout all aspects of our business. 

Any tax-based calculations completed by Mattioli Woods are for illustrative purposes only and we recommend you check these with your accountant or tax adviser. 

ISA guidance

Individual Savings Accounts (ISAs) are tax-efficient wrappers with the option to save via cash and/or stocks and shares, making them ideal for investors as there is nothing to include on tax returns. 

Full details are included in the investment guidance booklet found below and to which we would refer you. 

You can draw funds from your ISA and replace the amount within the same tax year without losing the tax benefits or using up any further allowance in that tax year, specifically: 

  • • ‘flexible’ ISAs enable investors to draw cash from their ISA and subsequently replace this within the same tax year without it counting towards their annual subscription allowance 
  • • the replacement of cash must happen within the same tax year the cash is drawn 
  • • any withdrawn cash not replaced before 5 April cannot later be replaced and will be a new subscription counting towards the investor’s annual allowance 
  • • payments to the flexible ISA will be counted first as repayments of any outstanding flexible withdrawals made in the current tax year and second as a subscription against the current year’s annual allowance 
  • • there is no carry over of either unused annual allowance or withdrawals between tax years 
  • • repayments of withdrawn funds may only be made to the account from which the associated withdrawal was originally made 
  • • the full value of the ISA may be drawn but withdrawals must not exceed the total value of the ISA (overdrafts are prohibited), even when the amount available for withdrawal is less than the total of the current year’s contributions 
Where will your investments be held?

Pershing Securities Limited is the administration platform selected to operate the service. For further information, please refer to the enclosed Pershing Terms of Business document. 

Who are Pershing Securities Limited

The administration platform we have selected to operate the service from is supplied by Pershing Securities Limited (‘Pershing’).  

Pershing

Pershing is part of the Bank of New York Mellon (BNY Mellon) group, the worldʼs largest custodian and one of the worldʼs leading investment services groups with in excess of $45 trillion in assets under custody and administration as at Q3 2023.  Pershing itself has circa $2 trillion under custody and administration globally.  There were three main considerations in selecting Pershing from its rivals: 

1. The security of your assets held on the Pershing platform is exceptional.  Not only are your assets held by the largest custodian in the world, but cash held within portfolios is managed across a wide range of banks to ensure diversification and is covered by the Financial Services Compensation Scheme (FSCS) up to the £85,000 limit. 

Pershing has specialised in the provision of custody, execution, and settlement services since 1939 and has been present in the UK since 1987.  It is highly selective in working exclusively on a business-to-business basis and has chosen to partner with over 180 organisations within the UK. 

2. As one of the largest global players in the market, our clients can have every confidence that Pershing’s systems and software will always be competitive and state-of-the-art. 

3. Pershing’s wealth management platform, NexusComplete, offers unrivalled facilities for client firms who would like to benefit from an investment management and administration tool that can embrace their assets through various wrappers. 

Pershing will provide quarterly valuations, quarterly custody statements, annual tax documents and contract notes, all accessible electronically via an investor portal or via post. 

Cash balances

A cash amount equivalent to the weight of the model portfolio’s cash asset allocation is retained at outset and will cover ongoing fees. 

You will receive a rate of interest on cash balances held with Pershing as decided by the MattioliWoods Treasury Committee. 

When this balance has been depleted and becomes insufficient to cover ongoing fees, we will either: 

  • • retain natural income on your investments where available 
  • • make a sale from the largest holding on the account for advisory and execution-only accounts

The amount of credit interest currently paid to clients is 1.25%, with Mattioli Woods receiving 3%.  As an example of the amount Mattioli Woods would receive, if your total investment held with Pershing is £100,000, and you have 1% held in cash, namely £1,000, Mattioli Woods would receive interest of £30 per annum, outside of the interest you receive.  Due to varying cash balances, the amount of interest retained by Mattioli Woods is not factored into our fee cost disclosure calculations. For current interest rates, please see www.mattioliwoods.com/resources. 

Pershing – capital gains tax service (only applicable if invested in taxable portfolio)

For taxable portfolios, Pershing can provide a capital gains tax (CGT) service for which the charge is £50plus VAT per account, per year.  We will switch this service on for multi-holding taxable portfolios, unless you opt out via the application form, and deduct £50 plus VAT in May each year for the previous tax year’s report.  Pershing will then produce and send you a CGT report (which will be combined with your consolidated tax voucher) every year.  The service also allows us to calculate notional CGT on your account on request. 

Investment services charge

Charges relating to the provision of investment services are 0.2% per annum of the total value of applicable assets administered by Pershing. 

This charge is calculated and deducted from your Pershing portfolio account quarterly in arrears.  This charge is for the provision of investment services associated with the processing and servicing of investments and other costs incurred on behalf of clients, including access to the Pershing client portal.  Pershing currently retains between 0.10% and 0.11% of this charge for the services it provides, including dealing, clearing, settlement, safe custody, and other associated services.  The figure retained by Pershing will be dependent on the aggregate value of assets held by Mattioli Woods’ clients with Pershing.  A full breakdown of the services provided by Pershing and their respective costs is available on request. 

The balance of this charge is paid to Mattioli Woods.  The figure paid to Mattioli Woods currently ranges between 0.09% and 0.10% and is dependent on the aggregate value of assets held by MattioliWoods’ clients with Pershing.  This charge is in addition to any advice or product fees MattioliWoods may charge you and is explicitly detailed within all our literature as the investment services charge.  The investment services charge will be deducted from your investment via Pershing. 

Provision for ongoing fees will be made via twice-yearly sales of units if required. 

The full terms and conditions of the services Pershing provides to you are set out in your Pershing Terms of Business document.  In the event of any conflict between the terms as described in this section and the Pershing Terms of Business, the Pershing Terms of Business takes precedence. 

Accessibility

Funds within your diversified income portfolio holdings can be accessed within seven to ten working days (should they be required) upon receipt of a written instruction.  However, unless otherwise instructed, we will continue to invest these with the objective of long‑term growth within your currently‑agreed investment strategy.

Income tax

Income tax is a tax you pay on your income which include interest on savings income.

Most people in the UK receive a personal allowance of tax-free income representing the amount of income you can have before you pay tax.  The amount of tax you pay can also be reduced by tax reliefs (for example on pension contributions) if you qualify for them.

Income tax rates, reliefs, allowances and so forth can change with each Budget and therefore, we do not supply tables setting them out.

Mattioli Woods plc is not a tax adviser and you should always seek professional guidance when dealing with personal taxation.

Dividend tax

You may get a dividend payment if you own shares in a company or an equity-based fund.  You do not pay tax on any dividend income from shares in an individual savings account (ISA) or that falls within your personal allowance, which is the amount of income you can earn each year without paying tax.

You also get a dividend allowance each year.  You only pay tax on any dividend income above the dividend allowance. 

Dividend tax rates, allowances and so forth can change with each Budget and therefore, we do not supply tables setting them out.

Dividend income that is within the dividend allowance (and savings income within the savings allowance) will still count towards an individual’s basic or higher-rate limits and may therefore affect the level of savings allowance they are entitled to, and the rate of tax that is due on any dividend income in excess of this allowance.

Capital gains tax

Capital gains tax (CGT) is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that has increased in value.  It is the gain you make that is taxed, not the amount of money you receive.

Some assets are tax-free such as ISAs, UK Government gilts, and betting wins!

You also do not have to pay CGT if all your gains in a year are under your tax-free allowance, while trusts also have a CGT allowance which is set at half of individual rate and will be split between the number of trusts you have created.  The rate of CGT payable depends on your income level.  We are not tax advisers, and we recommend you always seek professional tax advice when dealing with CGT.

You do not normally create a CGT liability with a gift to your spouse or civil partner (or to charity), but if they subsequently dispose of that gift then a charge can arise.

As with all tax rates and allowances, the Budget can change CGT rates and allowances.

Individuals must report capital gains where the total sale proceeds exceed the reporting limit.  This is regardless of whether there is an overall taxable gain.

Gains are reported on the self-assessment tax return and payment is usually due by 31 January following the end of the tax year in which the disposal occurred.

HMRC has introduced a real-time reporting service for CGT.  This can only be used if the individual does not normally complete a tax return.  It allows those with one-off capital gains to avoid the need to complete a full self-assessment.

Losses may be carried forward indefinitely, but need to be reported to HMRC within four years from the end of the tax year in which they arise.

Financial Services Compensation Scheme

In the event of the default of a provider you may be covered by the Financial Services Compensation Scheme (FSCS).  Any relevant technical details are included in the investment information, but in summary:

Investments

For firms that fail after 1 April 2019, the limit the FSCS may be able to provide as compensation is £85,000 per eligible person, per firm.  This would be for activities such as misleading advice, poor investment management or misrepresentation.

Full details are available via the FSCS website.

Investment compensation & protection | Check you're protected | FSCS

Diversified income Portfolio (DIP)
Online documents
Pershing documents

Pershing Securities Limited is the administration platform selected to operate the service.  For further information, please refer to the enclosed Pershing Terms of Business document.

Legal entity identifier

From January 2018 legislation requires that non-individuals who transact in the purchase of commodities, financial instruments (including stocks), and derivatives of such products require a legal entity identifier (LEI).

Essentially, what this means is that anyone with a discretionary or advisory portfolio, stockbroker account or directly held listed shares may be captured.  This is not from an individual perspective but rather for a scheme structure.

What is a legal entity identifier?

This is a unique identifier for legal entities or structures, including companies, charities and trusts, including SSAS.  Where an LEI code is allocated it is included in a global data system, thereby enabling every legal entity or structure that is party to a relevant financial transaction to be identified in any jurisdiction.  In order to be able to trade, we will need to apply (on your behalf) for a reference via the London Stock Exchange.  Upon application, we will receive confirmation of your unique LEI reference, which will then be used for any future acquisitions and transactions.

Costs

The LEI application is not a ‘one-off’ situation.  In respect of undertaking this work, there will be a fee of £119 plus VAT for the initial application, with an ongoing annual cost thereafter for each application of £104 plus VAT.  These prices, which are payable to the London Stock Exchange, are current and are subject to change.

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