Milford Income Fund

What does the Milford Income Fund aim to do?

• Generate income for investors that exceeds (after fees and tax) what they could get from short-term cash deposit investments in the bank; and
• Protect (against inflation) and grow the value of investors accounts (over a three year period).

The Milford Income Fund does this by taking an active approach to both investment strategy and selection of individual income generating investments (both fixed income and equity income securities). The Fund has four principal areas where it can add value to its investors

• Interest rate management – by deciding when to lock in higher rates by investing in longer dated fixed income securities
• Allocating between the different types of securities depending upon the relative attractiveness from a risk and return perspective
• Security selection – selecting those securities which will outperform.
• Managing risk – the Fund actively manages risks through diversification of investments and ensuring investors are appropriately rewarded for the risk incurred.

The Milford Income Fund will pay quarterly distributions to investors around the 20th of the month in February, May, August and November. Additionally, investors may elect to “top up” distributions by selling units but must recognise this can reduce the value of their investment capital in the Income Fund.

What income does the Fund currently generate and distribute?

The current distribution policy for the Fund is currently 1.40c per unit per quarter or 5.6c per unit per annum. This is lower than the before tax and fees rate being earned by the Fund as investors have no further tax to pay on any distribution. We have allowed for a tax rate of 28% to calculate the distribution; however, investors with lower tax rates are not disadvantaged as the value of their investments will rise relative to a 28% tax payer as they will have less tax to pay at the end of the financial year.

Please note that the total return investors receive will be a combination of distributions and changes in the value of the units due to movements (up and down) in the value of underlying securities. The objective of the Fund is to generate some capital growth to provide some protection against inflation however, this cannot be guaranteed and no amount of return can be promised and returns can be negative.

The distribution amount is different than the yield of investments in the Fund due to four main reasons:

• The ability to provide smooth investment distributions to investors over a medium-term period. There will be periods where market rates may be above long-term averages and vice versa.
• The ability to provide some growth in distributions over time by adopting a more cautious distribution policy.
• A buffer against any short-term negative movements in the value of fixed income and equity securities.
• Movements in the unit price – leading up to a distribution payment the unit price may rise reflecting income generated over the period. This means that the distribution yield maybe lower than the income being earned on investments

Milford will typically set a distribution rate which is lower than the actual income earned over-time. However, where distributions are lower than income received this will be reflected in an increase in the value of units (assuming no capital movements in investments) and potentially higher distributions in the future.

The current yield of investments is noted in the monthly Fund update.

What does the Fund invest in?

The Fund currently invests in five main investment sectors

1. Investment Grade Fixed Income – these are securities which are rated BBB or equivalent better by Standard and Poors or other rating agencies
2. Non-Investment Grade Fixed Income – these securities offer higher returns but potentially higher risk. We ensure that investors are more than compensated for this risk before we make any investment
3. Global Bond Managers – To access fixed income investments outside of New Zealand and Australia
4. Listed property securities – listed property companies in Australian and New Zealand
5. High yielding listed company shares – these will be in shares of companies which Milford believes have high and sustainable dividends.

The Fund will increase or decrease the relative weight to each sector depending upon our view of the attractiveness of the investment with regard to risk and return. In normal times the Fund will have about 75% in fixed income securities (items 1 – 3) and around 25% in equity related income securities.

By investing in equity related income securities we believe we can generate capital growth for investors whilst delivering consistent income. However, equity income securities may show greater variation in values over short time periods.

How has the Fund been performing and what is the Funds’
current strategy?

Please click here to get the latest update for the Milford Income Fund.
Please note that past performance is no guarantee of future returns.

Who is the Income Fund suitable for?

The Milford Income Fund is suited to investors who

• are relatively conservative and/or who have a shorter investment horizon (1 to 3 years);
• who are looking to receive regular income from their investments; or
• as the low risk income producing component of a balanced portfolio

The Income Fund is the only Milford Fund that currently makes distributions. However the nature of its investments means that some negative or positive fluctuations in the unit price of the Income Fund could occur. Therefore it is not guaranteed that the Fund’s capital value (unit price) will not fall from time to time.

How does the Fund compare to bank deposits?

The Milford Income Fund aims to produce a premium to what investors can achieve in the bank; however, there are some important distinctions between the Fund and bank deposits which include:

• Income returns are not fixed and will vary depending upon our distribution policy and income generated on underlying investments
• The value of investments will rise and fall with movements in the value of underlying securities – both fixed income and equity income securities
• Investors can withdraw their money at any point in time without penalty, unlike most fixed-term deposits
• The Fund is diversified amongst a number of companies which will typically include bank securities
• Distributions from the Fund are tax paid under current tax laws and investors do not need to include them on their tax return, (assuming investors select their correct tax rate)

An investment in the Milford Income Fund will be more volatile (good and bad) than bank deposits over shorter time periods (less than 1 year) and investors may suffer a fall in the value of their investment (although Milford’s objective is to avoid this). However, Milford believes that over the medium-term (1 to 3 years) that the possibility of a fall in the value of units is low and that the return premium generated by the Fund will significantly outweigh the extra risk incurred. It is important to note that Milford will only invest in securities where we believe that the Fund, and its investors, are compensated for the extra risk incurred. If we cannot find attractive investments the Fund will hold a large portion of bank deposits or equivalent.

How does the Fund compare to other Funds in the market?

We believe that the Milford Income Fund is unique compared to products offered by other New Zealand fund managers. Many fund managers have a fixed income funds which are typically 100% invested in fixed income securities and will typically be either 100% NZ or 100% global fixed.

In contrast the Milford Income Fund will typically be around 75% fixed income which will be a mix of NZ and global depending upon relative attractiveness. Additionally, the Milford Income Fund will have around 25% in income producing equities. We believe income producing equities can potentially boost after tax income for investors and offer the benefit of some capital gains. Importantly the Fund has flexibility to move between different types of income generating assets and into those that Milford believes offer the best risk and return combination. The Milford Income Fund will be actively managed and consistent with Milford’s investment philosophy will also look to protect the value of investors capital (against inflation) in weak investment markets.

Other managers have conservative funds which may have around 25% in share market investments. These funds are typically not focused upon investments that generate income and will generally be higher risk. Additionally, these funds usually do not offer distributions. Milford believes that the Milford Income Fund is very attractive for those investors who are looking for extra income but with risk actively managed in a diversified portfolio.

Key Features of the Milford Income Fund

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