Fund recommendations in your search for income

Investors are finding the search for safe sources of income more and more arduous. Institutional investors have driven down the yields available on 'quality' government bonds to multidecade lows of 1.5 to 2%. But inflation (CPI) is still running at more than 2.8% and expected to remain above the Bank of England's 2% target for at least the next 12 months.

So where should investors in need of an income turn?

Most investors are aware that securing a higher yield means taking on higher risk, so what other indications can we find where a higher yield is at least offset by a decent overall return?

Among 1,400-odd open-ended funds with a three-year record, there are more than 180 that offer a net portfolio yield in excess of 4%. That comfortably beats inflation and the current yield on the FTSE All-Share index.

But a high-income yield can also be a sign of poor performance on a capital level - or that significant risks are being taken to produce that high yield. What most income investors want, ideally, is a decent yield with some degree of security that capital is not being eroded and will grow over time.

I have included a few funds to be used as a starting point for income-seekers to explore. To qualify, the funds must have a net portfolio yield of at least 4%. I filtered these to include only those with three consecutive years of top-quartile returns among their relevant sector peers, or two years in the first quartile and one in the second.

I also included a handful of funds further down the rankings that have been awarded the top consistent return score by Lipper, the fund data provider. To make it a more manageable size, where there are multiple qualifying funds in a sector, the table shows a maximum of the top three qualifying funds on a total return basis.

Investment trusts

Investment trusts also deserve a mention. While many shares of high-yielding trusts that are doing well are quoted at high premiums to net asset value, some that are not on premiums (with a 4%-plus yield) are worthy of further consideration. They include Schroder Income Growth, Dunedin Income Growth, Standard Life Equity Income, Value & Income Trust, JPMorgan Claverhouse, JPMorgan Mid-Cap and TR Property.

None of these are risk-free routes but the path they have trodden in the past provides a degree of confidence that they can continue to navigate a safer passage in the future.

Higher income with higher overall returns

Sector Fund Net
return on
Sector Fund Net
return on
£ Corporate bond Ignis Corporate Bond 4.8 144.3 Global bonds
Principal GI Preferred Securities 5.8 150.4
  Royal London Corporate Bond 4.9 139.1   Invesco Emerging Markets Bond 5.1 144.1
  Royal London Ethical Bond 4.4 135.2 Global equity income
Veritas Global Equity Income 4.8 145.2
£ High yield Kames High Yield Bond 5.6 155.1   Newton Global High Income 4.9 138.4
  Invesco Perpetual Eurpn High Yld 5.3 154 Mixed invt 20-60% shares
Henderson Managed Distribution 4.9 139.1
  Baillie Gifford High Yield Bond 4.2 150.6   Invesco Perpetual Distribution 5.1 135.4
£ Strategic bond Aviva Inv UKR Managed High Inc 4.3 145.5   Premier Multi Asset High Income 5.2 127.3
  F&C Strategic Bond 5.1 137.8

UK equity & bond income

Threadneedle Monthly Extra Inc 4.3 135.8
  Invesco Perp Monthly Inc Plus 5.8 137.5   Jupiter Monthly Income 5.1 135.7
Asia Pacific exc. Japan Newton Asian Income 5.1 175   M&G Extra Income 4.7 133.2
Europe inc. UK JOHCM European Select Value 4 141.3 UK equity income
PFS Chelverton UK Equity Inc 6.7 157.3
Flexible invest TB Wise Income 6.6 131.9   Aberdeen UK Equity Inc 4.7 142.3
          Royal London UK Equity Inc 4.5 140.8

As at 1 June 2012, bid to bid, net income reinvested. See text for further information. Source: Lipper

You can check out the portfolios I've designed for Moneywise's sister website Interactive Investor here.