High Income

Funds in this sector do what they say on the tin – they aim to pay a high income to investors.

There's more than one way to try to achieve this though, and funds can use different approaches and invest in different areas.

Some funds focus on bonds. Bonds tend to pay a fixed rate of income, but the amount varies depending on the risk associated with the investment. Government bonds are perceived to be lower risk and pay a lower income to reflect this. Corporate bonds offer higher yields because of the extra risk taken for lending to companies. Bonds can be less volatile than company shares, but offer less potential to grow your income and initial investment.

Other High Income funds focus on dividend-paying shares and offer more potential for long-term growth. The UK has tended to be one of the highest-yielding markets in the world, so that's where a lot of income managers focus their attention. There's an increasing number of overseas companies that pay dividends as well though, which means High Income funds which hold these offer investors diversification away from the UK.

There are also High Income funds with the flexibility to invest in alternative investments. In addition to shares and bonds, they might also invest in property or infrastructure.

Remember, investments and the income they produce can fall as well as rise in value so you may not get back what you invest, and they should be considered for the long term. Income will vary and doesn't provide a guide to the income you'll receive in future. This should not be viewed as personal advice, so please seek advice if you're unsure.

Our view

We think funds in this sector are a great choice to potentially get paid a high income.

Interest rates have been at historic lows for several years. The prospect of an income from some of the world's more successful companies, or areas of the market, has appealed to investors willing to accept the risks.

Interest rates in many parts of the world climbed throughout 2022. This can reduce the appeal of dividend-paying company shares, as in theory interest rates on lower-risk assets like cash start to look more attractive. While key interest rates in the US, UK and Europe have risen and are high compared to the last decade, they remain relatively low by historical standards.

In our view it's important to balance a high income, income growth, and the aim to grow the value of your investment. It's not easy though, which is why we think it makes sense to invest with professional fund managers with good track records.

It's worth considering where each fund invests and what it tries to achieve. Some funds have more flexibility than others, so they may change where they invest over time depending on where they find the best opportunities for income. Overall, we think these funds could help maximise the potential for a high income, or be used to diversify a wider income portfolio.

Funds in this sector invest in different areas of the market, and some are more flexible than others. This means that performance can vary a lot between funds.

Most major global stock markets lost value during 2022, driven by a combination of rising inflation (and resulting interest rate rises), the lingering effects of COVID-19 and the conflict in the Ukraine. Global shares fell 7.30%* over 2022, with China and Europe (ex UK) falling 12.20% and 9.38%, respectively. China has struggled amid tighter regulation and lockdowns, whereas Europe has been impacted more by higher rates of inflation and the conflict in Ukraine. While there were losses over the year as a whole, most stock markets stabilised or rose by the year end compared to lows experienced earlier in 2022.

The UK, as measured by the FTSE All-Share, has delivered a small return, 0.34%, over the same period, buoyed by sectors like oil & gas and basic materials.

Global stock market performance over 5 years

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Past performance isn't a guide to the future. Source: *Lipper IM, 31/12/2022.

Annual percentage growth

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Past performance isn't a guide to the future. Source: *Lipper IM, 31/12/2022.

2022 was even weaker for bond markets. The IA £ High Yield sector average performance was -10.01%* with the IA UK Index-Linked Gilt sector average return of -35.28%. High inflation and rising interest rates have been the cause as both impact bond values negatively. This was one of the worst periods of performance for bonds in decades. It is hoped that we are through the worst of the bond market downturn. However with interest rates expected to rise further and inflation potentially remaining higher for longer, there are no guarantees that we have seen the bottom yet.

Annual percentage growth

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Past performance is not a guide to the future. Source: *Lipper IM, 31/12/2022.

Income update

Despite some ups and downs, to the end of 2021, growth-oriented investors outperformed their income peers. This was already a trend pre-COVID-19, but the differences in returns were amplified during the pandemic with many companies not being allowed to pay dividends while receiving government support.

This trend reversed in 2022, with dividend paying shares typically holding up better than the wider market. This is highlighted by the IA UK Equity Income sector average performance for 2022 being -1.95% compared to the IA UK All Companies sector average of -9.25%.

UK company dividends have held up well in 2022, increasing compared to 2021. It is worth noting that some of this is down to currency exchange rate movements between Sterling and the US Dollar. Lots of international companies pay dividends in US Dollars. Because the pound has lost value compared to the dollar, these dividends are larger when converted back to sterling, all else being equal. Currency movements are out of the control of investors and in future could move the opposite way.

Special dividends (one off or non-regular dividends) from UK companies were lower in 2022 compared to 2021. This was expected as 2021 was a bumper year for special dividends due to companies not having paid dividends in 2020, as noted above.

In terms of bonds, with prices falling considerably during 2022, the yields now on offer are more attractive than they have been for some time. This should help managers of high income funds that invest in bonds to generate more income with new investments that they make. However, for those bonds they bought before the price falls, the higher yield going forward is offset by the losses incurred over 2022.

Yields (%)

Yields are based on past income, so they aren't a reliable guide to future income. Source: HL as at 31/12/2022.

Latest research updates on funds in this sector