A new way to invest in the Intelligent Investor Equity Income Model

If paperwork isn't your thing but income investing is, a new product mirroring our Equity Income Model might be the ticket.

Paperwork and I have never seen eye-to-eye. I prefer to keep the administrative details of life at a safe distance, out of sight and out of mind.  And for many investors running their own SMSFs, paperwork is a real passion killer.

Fortunately, new ways of accessing funds are emerging that make this process easier. Listed investment companies have been around for a long time but the ball really got rolling with the ASX's mFund service, which allows investors to buy and sell some managed funds through their broker, just as they would listed shares.

Key Points

  • Expressions of interest sought for INIF

  • Low-hassle way of accessing Intelligent Investor Equity Income Model

  • Initial offer opens Monday 14 May

Active ETF's take this one step further, allowing you to buy or sell units in a fund as you would any other listed security but with no paperwork and transparent unit pricing.

Our new Active ETF, the InvestSMART Australian Equity Income Fund (ASX:INIF) will mirror the Intelligent Investor Equity Income Portfolio but cut out the application process and all the supporting documents you need to prove who you are. As a listed entity, you purchase it through your broker as you would an ordinary share.

If you're an income investor and have followed the Intelligent Investor Equity Income Portfolio, you might want to consider this as a simple, cost-effective way to access what I think has been one of our biggest successes over the past 20 years. The key details are shown in Table 1:

Table 1: Offer details and Proposed Timeline:

Initial Offer Opens Mon, 14 May
Initial Offer Closes Fri, 8 June
Expected Listing Date Mon, 18 June
Application price $2.50
Min. application amount $2,500

 

Since it began life in July 2001, when we all had a lot more hair, the model portfolio has averaged 12.5% a year to December 2017 (including a management fee of 0.97%), compared to the 8.2% a year achieved by the S&P/ASX 200 Accumulation Index.

After we opened it up for direct investment through the Separately Managed Accounts in July 2015, it has returned 11.1% per annum[1], compared to 6.7% for the S&P/ASX 200 Accumulation Index.

The fund aims to achieve a dividend yield close to that produced by the market, but to increase that income at least in line with economic growth, so that it can continue to fund investors' lifestyles indefinitely.

The current estimated annual income is a net 4.1% (excl. franking), compared to the 4.2% (excl. franking) generated by the S&P/ASX 200. The Fund's yield, however, is achieved without the index's large exposure to banks which we think adds considerably to risk to the Index. At the moment, the fund has less than 10% invested in the banks, compared to more than 20% for the S&P/ASX 200.

Since this stance has more to do with risk minimisation than value, we expect to stick with it even if the banks start to look very cheap.

At the moment, bank share prices have been under pressure from the ongoing revelations of misconduct at the Royal Commission. There are risks beyond regulation, such as technology, a highly valued property market and profits boosted by the lowest bad debts in recent history.

We couldn't say with any certainty what might come of these, but investors in the InvestSMART Australian Equity Income Fund can rest easy that it won't cause major damage to their investment.

The recent market downturn has provided some more stable opportunities. As James Carlisle wrote in his recent update: ‘Buy ideas can be a bit like buses. You wait around for ages and then several come at once.'

After taking profits in Macquarie Group in March, the cash weighting in the portfolio had increased to around 10%, but we've been able to put most of it to work by adding Wesfarmers and Scentre Group (the owner of local Westfield shopping centres) at attractive prices. With short-term performance down due to market falls, it's a good time to get involved.

The Active ETF structure differs slightly from the Separately Managed Account (SMA) format we use for the Intelligent Investor Equity Income Portfolio and we've highlighted the main differences in Table 2.

Table 2: SMA versus Active ETF

 
  SMAs Active ETFs
Holding Transparency Full break down of the shares you own updated daily. We publish our portfolio holdings on a monthly basis.
Ownership You are the beneficial owner of the stocks held in your account. Your money is pooled together with other investors and you own units in the fund.
Management Professionally managed by our in-house Investment Team. Professionally managed by our in-house Investment Team.
Distributions (Income) You receive distributions as the underlying constituents pay. You can elect to have them paid out or reinvested back into the model. You receive distributions of the fund's net income on a semi-annual basis. You can elect to have them paid out or reinvested back into the model.
Tax Treatment Each investor has their own individual cost base for each of their listed securities and receives distributions as they are paid by investments. Unitholders will receive 2 distributions each year which will include realised capital gains (if any).
Regular Contributions You can contribute additional funds to your account at any time or setup a regular contribution plan that is direct debited from your account at no additional cost. You can buy additional units in the fund through your broker at any time during market hours. You may incur brokerage costs. 
Allowance for in-specie transfers Yes. You can transfer securities in, or out of your SMA. No
Minimum Investment $10,000 – $25,000 dependent on model No minimum
Application Process Start your application online, AML (Anti money laundering) checks required. Buy and sell units on the ASX using its ASX code through your broker.
Redemption Process Complete a form and submit online (email) Sell on market


 

As for the fee differences, well, there's not much. The Active ETF charges a flat 0.97% per annum (the SMA 0.77% to 0.97% depending on the investment amount) and there are no performance fees on either.

So that's it. If you'd like more information on the InvestSMART Australian Equity Income Fund (ASX:INIF) or to download the PDS, you can find it here.

We're looking to gauge the level of interest in the next few weeks but won't proceed without securing a minimum total investment of at least $10m to get the thing going. So if you're interested in making an investment, you can register your interest here.

 

[1] *As at 31 March 2018. Return per annum since 01 Jul 2015 after investment and admin fees, not including franking credits. ^Including franking credits.

Disclaimer
Intelligent Investor provides general financial advice as an authorised representative under the AFSL held by InvestSMART Publishing Pty Limited (Licensee). InvestSMART Funds Management Limited (RE) is the responsible entity of various managed investment schemes and funds and is a related party of the Licensee. The RE may own, buy or sell the shares suggested in this article simultaneous with, or following the release of this article. Any such transaction could affect the price of the share.

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