There are no risk-free investments, but by looking at past performances you can gain confidence in future performance. Andrew Pitts takes a look at high income funds with high overall returns.
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
yield
% |
3-year
return on
£100 |
Sector |
Fund |
Net
yield
% |
3-year
return on
£100 |
| £ 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.
Inflation
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
Yield
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
FTSE All-Share Index
Originally known as the FTSE Actuaries All Share Index, the FTSE All-Share Index is a stock market index that aims to capture 98% of the full value of the London Stock Exchange. This means it’s a more accurate reflection of the overall UK stock market. The FTSE All-Share is the aggregation of the FTSE 100, FTSE 250 and FTSE Small Cap Indices. (Below the FTSE 100 is the FTSE 250 comprising mid-capitalised companies not covered by the FTSE 100, and representing approximately 15% of UK market capitalisation. Added together, they make the FTSE 350. Next comes the FTSE SmallCap, which consists of companies outside of the FTSE 350 Index and represents approximately 2% of UK market capitalisation.)
Excess
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
CPI
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Emerging markets
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Corporate bond
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
