Where we see the holy grail of income

Sustainable income - healthy returns and downside protection - is the holy grail of income investing. Can an equity strategy deliver this?
Andrew Fraser

Merlon Capital

Inflation is one of the biggest challenges facing investors, particularly retirees. 

It’s hardly a new problem. Inflation is a constant but, given it’s sitting at around 7%, it’s a pressing concern. How do you generate enough income from your investments to sustain your needs and keep up with inflation, without taking on too much risk?

The answer is sustainable income - what we view as the holy grail of income.

What we mean by sustainable income is that the income lasts. In turn, this means capital is largely preserved through time while taking inflation into account. One of the keys to this is the use of franked dividends from Australian equities, but it isn’t as simple as just investing in the top ASX200 companies for your income.

The ASX200 index is heavily skewed towards larger companies, with dividends dominated by iron ore (30%) and the banks (23%). Both of these are macro-sensitive, hardly a contender for capital preservation or sustainability across market cycles. 

To avoid this trap in the Merlon Australian Share Income Fund, we focus on valuing companies on the basis of sustainable free cash flow and absolute upside, rather than on the basis of index weights. We also incorporate downside protection to offset 30% of the equity exposure in the Fund.

In this Fund in Focus, I’ll share our approach to investing in companies with sustainable income and introduce you to the Merlon Australian Share Income Fund.

Time stamps:

  • 0:00 Introduction
  • 0:23 How Merlon’s approach is different
  • 1:41 Investment philosophy
  • 2:14 Implementing our investment philosophy
  • 2:47 Portfolio diversification of income and growth
  • 3:22 Risks in retirement and the need for downside protection
  • 3:43 Sustainable income paid monthly and majority franked
  • 4:05 Merlon Australian Share Income Fund

Learn more

The Merlon Australian Share Income Fund is a portfolio of what we consider to be undervalued companies constructed without regard to index weights, delivering monthly income with downside protection. Visit our website or fund profile below for more information. 

Managed Fund
Merlon Australian Share Income Fund
Australian Shares
Equities
The key criteria for sustainable equity income (and Merlon's top 3 picks)
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The information in this material has been provided by Merlon Capital Partners Pty Limited ABN 94 140 833 683 AFSL 343 753 (Merlon), the investment manager of the Merlon Australian Share Income Fund ARSN 090 578 171 (the Fund). Fidante Partners Limited ABN 94 002 835 592 AFSL 234668 (Fidante) is a member of the Challenger Limited group of companies (Challenger Group) and is the responsible entity of the Fund. Other than information which is identified as sourced from Fidante in relation to the Fund, Fidante is not responsible for the information in this material, including any statements of opinion. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable to your circumstances. The Fund’s Target Market Determination and Product Disclosure Statement (PDS) available at www.fidante.com should be considered before making a decision about whether to buy or hold units in the Fund. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Past performance is not a reliable indicator of future performance. Any projections are based on assumptions which we believe are reasonable but are subject to change and should not be relied upon. Merlon and Fidante have entered into arrangements in connection with the distribution and administration of financial products to which this material relates. In connection with those arrangements, Merlon and Fidante may receive remuneration or other benefits in respect of financial services provided by the parties. Fidante is not an authorised deposit-taking institution (ADI) for the purpose of the Banking Act 1959 (Cth), and its obligations do not represent deposits or liabilities of an ADI in the Challenger Group (Challenger ADI) and no Challenger ADI provides a guarantee or otherwise provides assurance in respect of the obligations of Fidante. Investments in the Fund(s) are subject to investment risk, including possible delays in repayment and loss of income or principal invested. Accordingly, the performance, the repayment of capital or any particular rate of return on your investments are not guaranteed by any member of the Challenger Group. Livewire gives readers access to information and educational content provided by financial services professionals and companies (“Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

1 fund mentioned

Andrew Fraser
Principal and Portfolio Manager
Merlon Capital

Andrew joined Merlon Capital Partners as Principal and Portfolio Manager upon its establishment in May 2010 and holds the role of Risk Management / Trade Execution. Prior to joining Merlon, Andrew was the Senior Dealer for Challenger Limited’s...

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