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 achieve this though. Each fund uses a different approach and invests in different areas.
Some funds focus on bonds. These tend to pay a fixed rate of income, but the amount varies from bond to bond. 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 funds invest more in dividend-paying shares and offer more potential for long-term growth. The UK is currently 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, and some funds offer diversification away from the UK.
There are also funds with the flexibility to invest in all kinds of investments. In addition to shares and bonds, they might also invest in currencies, property or commodities.
We think these funds are a great choice to make a high income today.
Interest rates are still at historic lows. And they're unlikely to rise significantly in the short term. So the prospect of a regular income from some of the world's most successful companies is attractive.
But the risks are greater if you only chase the highest yields, or invest in a narrow range of high-yielding investments. This creates a higher hurdle to grow your income each year, and sooner or later it could become unsustainable.
In our view it’s important to balance a high income, dividend growth, and the aim to grow the value of your investment. It’s not as easy as it sounds though, which is why we think it makes sense to invest with professional fund managers with great track records. Our favourites feature on the Wealth 50.
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.
The HL Multi-Manager High Income Fund is also available. Our investment experts put together a selection of funds and aim to pay a high income. It blends different types of fund, and moves between different areas of the market, depending on where the best income opportunities are. The managers aim to grow this income payment over time too. This extra layer of management means there are additional charges with running a multi-manager fund. The fund is managed by our sister company, HL Fund Managers.
Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.
Funds in this sector invest in different areas of the market, and some are more flexible than others. So performance will vary widely between funds.
Both share and bond markets have performed well over the past five years. Funds investing in these areas have also generally delivered good returns. Those that have invested more in shares, or taken on more risk by investing in areas such as high yield bonds, have tended to perform better. This isn’t a guide to how they’ll perform in future.
Global sectors - five year performance
Past performance is not a guide to the future. Source: Lipper IM to 31/12/2018
Over the past year most global stock markets have been volatile and lost money. Concerns about Britain’s exit from the EU put a lot of people off investing in the UK. And the escalating trade war between the US and China put pressure on Asian and emerging stock markets. The US stock market made a small positive return, in sterling terms, though.
Concerns over rising interest rates, and the potential for governments around the globe to withdraw policies that’ve helped keep bond prices high, meant global bond markets were also volatile. Most bond markets made a small gain by the end of the year though. In the UK, corporate bonds lost money. But government bonds, which are perceived to offer some safety during uncertain times, did better.
We think government bonds are still useful to diversify a portfolio, but yields are low. Corporate bonds, including high-yield bonds, offer more attractive yields for investors able to accept the extra risk. It’s a similar story with emerging market bonds. Bonds are less likely to offer much in the way of income growth, but they’re a good way to diversify an income portfolio focused on shares.
We think stock markets should deliver good returns, including income growth, for investors able to take a long-term view. The UK is currently one of the world’s highest-yielding stock markets, and we view it as an attractive option for income investors.
But an increasing number of companies in other markets, like Asia, are paying out their profits out as dividends. We expect this trend to continue over the long term. So it’s worth considering some overseas investments for an income portfolio too. This will also give some exposure to foreign currencies, which can be beneficial if sterling is weak, but the opposite’s true if the pound’s strong.
|Yields of various asset classes (%)|
|Global high yield bonds||7.5|
|Emerging market bonds||6.9|
|European high yield bonds||5.1|
|UK corporate bonds||3.1|
|UK government bonds||1.3|
Yields are based on past income, so they aren't a reliable guide to future income. Source: HL as at 31/12/2018
Our favourite funds in the sector
For more information on the risks, please refer to the Key Investor Information Document for each fund. Remember all investments can fall as well as rise in value so you could get back less than you invest. Past performance isn’t a guide to the future. Please note that funds like these tend to take their charges from capital which can increase the yield but reduces the potential for capital growth.
Wealth 50 funds
Non-Wealth 50 funds
Source for performance figures: Financial Express
This fund aims to generate an attractive and sustainable income by investing across global markets, including higher-risk emerging markets, with a focus on shares.
Robin Hepworth invests in unloved companies from across the globe. Their share prices could rise and boost growth as and when they return to favour. In the meantime the fund aims to pay investors a regular income. This style’s generally been out of favour with investors and the fund’s performed in line with its peers over the past year. His longer-term performance has been excellent and we think the tide will eventually turn back in his favour. Past performance isn’t a guide to future returns though and there are no guarantees. Around 75% of the fund is currently invested in shares. The rest is invested in bonds and cash, which could provide some stability if markets hit a rough patch. We think this is an excellent mixed-investment, income-focused fund.
This fund invests flexibly across the fixed-interest markets, from government bonds to higher-risk high yield bonds. Up to 20% can be invested in shares, which could boost long-term income and growth.
It’s been a tougher year for stock and bond markets and this affected the fund’s performance. Alex Ralph has a good long-term track record though and she’s delivered a good level of income since running this fund. Past performance isn’t a guide to future returns and the fund’s income isn’t guaranteed. We like her flexible investment approach and willingness to change how the fund’s invested depending on her views of the wider economy and bond markets. A focus on high yield bonds and some investments in dividend-paying companies makes this fund higher risk than some other funds focused solely on bonds. But it could boost the income it pays.
Eric Holt and his team invest in a wide range of bonds in different sectors and from different companies. They also look in areas ignored by many other bond fund managers.
We think this fund is an excellent choice for a high income from corporate bonds. In addition to more traditional corporate bonds, the managers invest in areas overlooked by most investors. They invest in some bonds backed by the assets a company owns, such as property. They also invest a lot in high-yield bonds to boost income, but this increases risk. The fund’s performed better than its peers over the past year and long-term performance has also been excellent. It’s a more adventurous option though, so it might not hold up as well as some other bond funds when markets hit a rough patch.
This is also an offshore fund. This means investors are not normally entitled to compensation through the Financial Services Compensation Scheme.
Neil Woodford has lots of flexibility with this fund. He’s able to make investments anywhere in the world depending on where he’s found the best income opportunities. This includes smaller companies, which increases risk, and so does the flexibility to use derivatives.
The manager takes a different view to many investors. He often invests in sectors or companies that are out of favour, which he thinks offer great value, an attractive income, and the potential to perform better in future. A lot of UK companies meet his criteria at the moment so this is where the fund is focused. This has held back performance over the past year because the UK’s been shunned by many investors. But this isn’t the first time Woodford’s been through a weaker spell of performance, only to come good again. We think the fund has the potential to do well in future and pay investors an attractive income.
This fund tries to pay investors a higher income than most funds. It uses tools, including derivatives, which could boost the income paid, though this increases risk.
The managers mainly invest in dividend-paying companies in the UK, but they have some flexibility to invest overseas too. Around half the fund’s income is made naturally from the dividends paid by the underlying companies. The managers then also use different techniques to increase the income paid, but these have the potential to erode the value of your investment. So we think this type of fund should only be considered by those who need a high income now, but are less concerned if the value of their remaining investment falls over time. The fund’s held up a bit better than the broader UK market over the past year, but performance has been inconsistent over the longer term. This isn’t a guide to future returns though.
Latest research updates
Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.
Our expert research team provide regular updates on a wide range of funds.