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High Income

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

Kate Marshall - Senior Investment Analyst
20 July 2020

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. These 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 currencies, property or commodities.

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. 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 are still at historic lows and unlikely to rise significantly in the short term. So the prospect of a regular income from some of the world's more successful companies, or areas of the market, 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 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.

Investment notes

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.

Wealth Shortlist funds in this sector

Funds chosen by our analysts for their long-term performance potential

See THE WEALTH SHORTLIST

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.

2020 has so far been a volatile year for both stock and bond markets. The coronavirus crisis has brought unprecedented challenges to economies around the world, and this has affected the way markets have behaved.

So far this year, to the end of June 2020, the FTSE World Index has made a small gain of 0.6%. Share prices fell heavily in February and March, as the Covid-19 outbreak took hold, created mass uncertainty, and pushed investor sentiment into a downward spiral. Most stock markets have since recovered to some extent, as major global governments and central banks stepped in with extensive fiscal packages to support domestic demand and economic activity. But the impact on markets varies from country to country, depending on the extent of the policies put in place and the rates of infection. Past performance isn't a guide to future returns and remember this is a short time period.

The US stock market has performed best so far this year, gaining 4.7% to 30 June, helped by some of the world's most well-known tech companies such as Amazon and Netflix. The broader Asian stock market has also made a small gain so far this year. Many Asian countries have fared well compared to some others, after taking swifter action heading into the pandemic.

Latin American economies, particularly Brazil, have been criticised for their mishandling of the crisis, so the region is home to some of the world's worst-performing markets. The UK hasn't done well either – similarly it's suffered from a high number of coronavirus cases, while its market also has a bias towards weaker sectors such as financials and oil & gas.

Global stock markets - year to date performance

Past performance is not a guide to the future. Source: Lipper IM to 30/06/2020

Bond markets have generally held up better so far this year, and bonds are often seen as a safe haven during times of uncertainty. That said, they have still been volatile and also lost money between February and March.

In terms of the major bond sectors, UK government and inflation-linked government bonds have done best so far this year. But higher-risk high yield bonds have fallen in value. These bonds are issued by companies that are less likely to be able to pay off their debts and, therefore, they have tended not to do so well when the economic outlook was weaker. Again please remember this is over a short time period.

Global bond markets - year to date performance

Past performance is not a guide to the future. Source: Lipper IM to 30/06/2020

Income update

We think stock markets should deliver good returns, including income growth, for investors able to take a long-term view.

That said, Covid-19 will inevitably have an impact on companies' abilities to pay dividends to shareholders, at least in the short term.

A dividend-paying culture has been embedded in the UK for many years, and so it's always tended to be one of the world's highest-yielding equity markets. But this year many companies have been forced to cut, or at the very least review, dividend payments. Some are no longer getting the cash flows they need from consumers in order to support dividends. While others are holding on to cash in order to weather the storm and try to come back stronger once the crisis blows over.

While there will be further economic shocks to come, the strongest companies will survive and hopefully reinstate dividends once the worst is over, but as ever there are no guarantees. Importantly, some companies aren't actually in a position where they can't afford to pay a dividend. Instead they're being prudent, and holding onto cash to see them through these tougher times. Eventually some of this cash could be paid out to shareholders.

An increasing number of companies in other markets, like Asia, pay their profits out as dividends. We expect this trend to continue over the long term. So it’s worth considering overseas investments for an income portfolio too. This also gives some exposure to foreign currencies, which can be beneficial if sterling is weak, but the opposite’s true if the pound’s strong.

In terms of bonds, we think government bonds are still useful to diversify a portfolio. But yields are low and the effect of inflation means investors get little reward in the form of income for lending to governments, particularly in the case of developed markets. 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 help diversify an income portfolio focused on shares.

Yields of various asset classes (%)
Global high yield bonds 6.6
Emerging market bonds 5.5
European high yield bonds 4.8
UK shares 4.7
Asian shares 2.8
Global shares 2.2
UK corporate bonds 1.2
UK government bonds 0.2

Yields are based on past income, so they aren't a reliable guide to future income. Source: HL as at 30/06/2020

Investment notes

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.

Our Wealth Shortlistfeatures a number of funds from this sector, selected by our analysts for their long-term performance potential. The Shortlist is designed to help investors build and maintain diversified portfolios. To use the Shortlist to build your portfolio, you should be comfortable deciding if a fund fits your investment goals and attitude to risk. For investors who don't feel comfortable building and maintaining their own portfolio we offer ready-made solutions, which are aligned to broad investment objectives. For those who want extra help, you can also ask us for financial advice.

The fund reviews below are provided for your interest but are not a guide to how you should invest. For more information, please refer to the Key Investor Information for the specific fund. Remember all investments can fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future. The funds in this review take their charges from capital, which could boost income but reduce the potential for capital growth.

There is a tiered charge to hold funds on the HL platform. It is a maximum of 0.45% a year - view our charges. Comments are correct as at 30 June 2020.

Wealth Shortlist fund reviews

Source for performance figures: Financial Express

This fund aims to pay a higher income than many other funds. Shares form most of the fund and have the potential to generate an income and long-term growth. Some investments in bonds and cash provide diversification, and could reduce part of the volatility that normally comes with only investing in shares. We think the fund could work well in a portfolio focused on trying to achieve an income, alongside some capital growth. It could also provide some balance alongside equity funds in a more adventurous income-focused portfolio.

Robin Hepworth, the fund's manager, has done an excellent job for investors since launch in 1994. The fund didn’t hold up quite as well as its peers during the recent coronavirus crisis though. Its focus on unloved companies whose share prices don’t reflect their true value held back performance. It's a style that's been out-of-favour in recent years because investors preferred the perceived consistency of companies with a history of growing their earnings year after year. The fund's focus on UK companies, which performed poorly compared to their overseas peers, also held back returns.

Overall, we continue to believe Robin Hepworth and his team are capable of delivering strong performance over the long term, but there are no guarantees.

This fund is focused on producing a high income mainly by investing in bonds, but it can also invest up to 20% in UK and European shares. A focus on high-yield bonds and shares makes it a little different from most bond funds, though it also makes it a higher-risk option. The fund could be a good option to diversify a conservative bond portfolio, or a more adventurous shares portfolio seeking exposure to other asset classes.

Alex Ralph is the lead fund manager and we think she’s a talented investor with over 19 years investment experience. We like her flexible investment approach and willingness to change how the fund is invested depending on her views of the wider economy and bond markets. Ed Legget and Paul Casson choose the UK and European shares for the fund.

Ralph has delivered a good level of income since running this fund. Investments in high-yield bonds and shares can increase volatility though and are higher-risk. This means the fund might not hold up quite as well as some other funds in the sector when bond markets go through a tough patch.

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Link Asset Solutions have today confirmed that the LF ASI Income Focus Fund (the Fund), formerly the Woodford Income Focus Fund, will re-open on 13 February 2020.

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ASI has been appointed as the new portfolio manager for the Woodford Income Focus fund, Link Asset Services have announced today.

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Woodford Income Focus remains suspended while Link considers whether to appoint a new manager, transfer the Fund’s assets or wind up the fund.

Woodford Income Focus – all dealing suspended

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Wed 16 October 2019

Dealing in the Woodford Income Focus fund has been suspended. The value of the fund will continue to be based on the price of the underlying holdings.

Investment notes

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.

Fund research

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