Investment funds for income seekers
This article was produced by our sister publication Money Observer. _14.jpg)
Where are financial advisers suggesting their income-seeking clients put their money? Faith Glasgow asked our panel for two recommendations.
The first group is for investors looking for an immediate high income, even if that involves the potential sacrifice of an element of capital.
The second group of funds are for those with a longer-term perspective, on the hunt for a fund that might be delivering a lower yield but is designed to grow capital and the income stream produced over the years.
IMMEDIATE INCOME
Price 64.5p Yield 3.2% TER 1.16%
Melvyn Bell, investment manager at Lowes Group, recommends the flexibility of a strategic bond fund. He likes M&G's Strategic Corporate bond because of its strong performance and the "excellent track record" of manager Richard Woolnough. "He has more high yield in the portfolio than he's ever had, but the big plus is that he can switch out if he wants," adds Bell.
If maximising income at all costs is a priority, Bell suggests the Kames Capital High Yield bond fund (yielding 5.8%). "High-yield funds are producing attractive yields now, and the companies they're investing in are generally a lot more secure than they used to be," he adds.
Price 50.9p Yield 6.9% TER 1.71%
"I know many don't like Newton Higher Income, but it has delivered what it set out to do, in terms of a focus on higher income rather than capital preservation or growth," argues Philippa Gee of Philippa Gee Wealth Management. "Yes, its dividend expectations were lowered with a 25% cut in September, but it remains attractive for what it does."
However, its medium-term performance has been mediocre: over three years it has produced total returns that languish in the third quartile.
Price 56.9p Yield 6.4% TER 1.71%
As Adrian Lowcock at broker Bestinvest observes, this equity-based fund managed by Thomas See provides a meaty yield and a valuable income boost to the portfolio of any higher-income seeking investor. Income Maximiser uses derivatives and short-dated call options to generate extra income.
However, Lowcock cautions that, "in focusing on maximising income, it sacrifices much of the potential for capital growth".
This UK fund, and its Asian counterpart, are also liked by Anna Sofat of Addidi Wealth, though she too adds a caveat, warning that volatility may be above average.
Price 119.9p Yield 3.4% TER 1.41%
"I prefer high-yield bonds right now, as you are at least being paid for the risk you're taking," says Darius McDermott of Chelsea Financial Services. One high-yield fund he recommends is M&G Optimal Income, managed by Richard Woolnough: "M&G has an excellent bond team with consistent performance."
The fund is currently paying a relatively modest yield, but in terms of total returns it has turned out first-quartile performance over one and three years.
Threadneedle Emerging Market Bond
Price 59.3p Yield 4.7% TER 1.7%
Sofat is keen on the opportunities for high yield from overseas debt. It is possible to tap into the asset class through sterling strategic bond funds, but for a more focused approach, Sofat picks Threadneedle's sterling-based bond fund because it has "a good track record - a 12-month yield of nearly 7% and strong three and five-year performance with relatively low volatility."
GROWING INCOME
Price 1,217p Yield 3.9% TER 1.68%
James Davies, investment research manager at Close Brothers Asset Management, believes that a good starting point for equity investors needing a steady but growing income is the Invesco Perpetual Income fund, managed by Neil Woodford.
"He specifically focuses on companies that are capable of growing their earnings and dividend distribution over time," explains Davies. "The long-term performance relative to the wider market is excellent, though during times of market exuberance the fund can appear to lag." That's reflected in the fund's third-quartile returns over three years, although it's back up among the leaders over the past 12 months.
Price 393.6p Yield 4.5% TER 1.69%
Philippa Gee picks Jupiter Income, managed by Tony Nutt, as "a really interesting fund". As she explains, the fund has "gone through some very challenging years and had been written off by some" - no doubt on the back of its sub-par performances over three and five years. "However, this fund is certainly coming good in recent nervous markets and Tony Nutt is a manager I still trust," adds Gee.
Price 152.8p Yield 5.3% TER 1.66%
Newton's Asian Income fund, managed by Jason Pidcock, is tipped by Adrian Lowcock on the grounds that it not only offers a high and growing dividend but also gives investors exposure to the greater growth potential available from Asian companies. "The manager has a strict income-yield discipline, which we believe is essential to building a strong long-term track record," he adds.
The fund is top of the Asia Pacific ex Japan sector over the past year, having been particularly resilient in more difficult markets, and fourth over three years. Over five years it has returned 79% against the sector average of 48%.
Price 124.8p Yield 3.5% TER 1.67%
Darius McDermott highlights the more internationally oriented M&G Global Dividend fund. "We like it because it specifically looks for companies worldwide that are growing their dividends," he says.
However, the manager, Stuart Rhodes, is equally focused on capital growth potential, and is aiming to maximise total returns as well as growing distributions over the long term. Rhodes's fund has been top-quartile over one and three years, returning 59% over three years against the global sector's 37%.
Price 97.8p Yield 5% TER 1.59%
Anna Sofat suggests Lazard's fund, managed by Andrew Lacey, as a longer-term investment for a growing income stream. "This is a well-diversified fund with a 12-month yield of approximately 5.5% and solid three-year performance. It is also slightly less volatile than many global equity funds," she observes.
The past year has seen top-quartile performance, though there's little comfort for investors in real terms: the fund is marginally down on 12 months ago, but less so than the sector average.
The yields quoted are data provider Lipper's projected yield figure, which is usually lower than those quoted on factsheets. The total expense ratios do not include any performance fee.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
This article was taken from the January 2012 issue of Money Observer.
Subscribe to Money Observer
Subscribe for just £1 and receive 3 issues
New subscribers take advantage of this fantastic deal with a moneyback guarantee if you decide Money Observer isn't for you.