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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.

Tom Mills - Senior Investment Analyst
28 July 2021

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. 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 are still at historic lows and unlikely to rise significantly in the short term. So the prospect of an income from some of the world's more successful companies, or areas of the market, is attractive for investors willing to accept the risks.

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. This means that performance will vary widely between funds.

Global share markets suffered steep declines in the first three months of 2020 as the pandemic began, but governments and central banks reacted decisively, easing investors’ fears and enabling a strong recovery over the rest of the year. This continued in the first half of 2021 and major share markets have all now fully recovered last year’s losses, despite gross domestic product (GDP) remaining below pre-pandemic trends in most countries.

Over the past 12 months, global shares produced a healthy return of 25.5%*. Investors have held an optimistic outlook for global growth, with economies recovering and reopening as vaccine rollouts continue. This has varied by country and affected sectors differently. The announcement of successful coronavirus vaccine trials last November improved the fortunes of companies and sectors most closely linked to the health of the UK economy. This includes travel and leisure, oil & gas, mining and financial companies, which at first bore the brunt of the crisis.

In the first half of 2021 the US continued to outperform other global and UK shares, but all produced strong returns. Over the past five years, the difference is stark, with US shares returning 122.3% compared with a return of 36.9% for UK shares. Past performance is not a guide to the future.

The UK could still be described as unloved by investors. Compared to the US it has fewer growth and technology companies, and more exposure to sectors that have been largely out of favour in the past five years, such as financials and oil & gas. Brexit has been an additional uncertainty for investors.

Chart showing Global stock market over 5 years to June 2021

Scroll across to see the full chart.

Five year global shares performance

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Sector Jun 16 – Jun 17 Jun 17 – Jun 18 Jun 18 – Jun 19 Jun 19 – Jun 20 Jun 20 – Jun 21
FTSE All-Share TR 18.1% 9.0% 0.6% -13.0% 21.5%
FTSE Emerging TR GBP 24.1% 5.9% 8.3% -0.4% 24.5%
FTSE USA TR GBP 21.6% 12.7% 14.3% 11.6% 27.1%
FTSE World TR GBP 22.9% 9.3% 10.4% 5.8% 25.5%

Past performance is not a guide to the future. Source: *Lipper IM to 30/06/2021.

Chart showing Global bond market performance over 5 years to June 2021

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Five year global bond sector performance

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Sector Jun 16 – Jun 17 Jun 17 – Jun 18 Jun 18 – Jun 19 Jun 19 – Jun 20 Jun 20 – Jun 21
IA £ Corporate Bond TR 6.8% 0.6% 5.6% 5.7% 3.4%
IA £ High Yield TR 11.1% 0.6% 5.3% -2.5% 13.8%
IA UK Gilt TR -0.6% 2.1% 4.9% 11.7% -7.0%
IA UK Index Linked Gilt TR 6.9% 1.9% 8.9% 11.4% -4.4%

Past performance is not a guide to the future. Source: Lipper IM to 31/1/21.

While 2021 has so far been positive for shares, it’s been a different story in bond markets. Corporate bonds lost 1.5%* while UK gilts fell by 6%, with a large sell-off at the start of the year. This came as confidence grew in the economic recovery, raising the possibility of higher inflation, and causing investors to factor in an increased likelihood of higher interest rates.

Year-to-date, only high yield bonds have produced a positive return among the major bond sectors. Over the past five years, it’s also been high yield bonds that have delivered the highest return among the major bond sectors, but this hasn’t been a smooth journey. These bonds are issued by companies that are less likely to be able to pay off their debts and, therefore, they have tended to do less well when the economic outlook weakens – such as the start of 2020 – but they tend to do better when the economic outlook is more positive.

Income update

Despite some ups and downs, the last five years have been a good period for growth-oriented investors, but it’s remained a more challenging environment for investors seeking a higher income. The yields offered by various asset classes are low, with investors needing to take on a higher level of risk, to receive a given level of income, than has been the case in previous market eras.

Meanwhile, the prospect of higher inflation – whether it proves transitory or more lasting – confronts income investors with a further risk of eroding their ‘real’ (or inflation-adjusted) income. There are increasing signs that pent-up demand and supply constraints could push up prices, while at the same time central banks might let inflation run higher in the short term after a period of low inflation.

We think stock markets could deliver good returns, including income growth, for investors able to take a long-term view. But 2020 was a particularly challenging year for equity income investors. UK shares have traditionally offered relatively attractive dividends and they continue to offer a higher yield than global shares. However, underlying dividends in the UK fell by an estimated 41.6% in the 12 months to March 2021, compared with the prior 12 months, as the pandemic had an outsized impact on some of the UK’s biggest dividend-payers such as miners, oil companies and banks – these three sectors accounted for three fifths of UK dividend cuts by value. During this period the UK winners were food retailers who were able to increase their dividends by 22% overall.

Dividends held up better in other markets, and it’s estimated that on a global basis, the value of underlying dividends reduced by 14% over the 12 months to March 2021.

Thankfully, dividends in the UK and other markets have been showing signs of improvement even though they remain below pre-pandemic levels. During the crisis last year, regulators placed restrictions on bank dividends to protect their balance sheets, but these are expected to be removed, enabling banks to increase their dividend pay-outs this year. The global economic recovery has pushed commodity prices higher, causing a surge in profits for mining companies this year and enabling them to raise their dividends and pay special, or one-off, dividends.

Link Group currently forecasts that UK dividends will increase by 17.2% year-on-year in 2021 in a best-case scenario, and by 11.1% in a worst-case scenario, and will be on track to regain their pre-pandemic levels by around 2025. A separate forecast for global dividends suggests a 7.3% rise in underlying dividends, in 2021 compared with 2020 although there are no guarantees.

Some sectors and companies will bounce back more quickly than others – meaning the recovery in dividends will be uneven. We think this provides an opportunity for active fund managers to prove their worth.

Dividend yields are a function of market levels as well as dividend amounts. With the UK share market rising by 21.5% in the past 12 months, the dividend yield for UK equities has reduced from 4.7% to 2.8%. This is still higher than other major share markets, and the yields of many types of bonds. Remember that yields are not guaranteed, nor are they a reliable indicator of future income.

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. We also saw global dividends prove more resilient than UK dividends in 2020. 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 4.1%
Emerging market bonds 4.9%
European high yield bonds 2.6%
UK shares 2.8%
Asian shares 2.0%
Global shares 1.65%
UK corporate bonds 1.7%
UK government bonds 0.7%

Yields are based on past income, so they aren't a reliable guide to future income. Source: HL as at 30/06/2021.

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 Shortlist features 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 2021.

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. The fund invests mainly in developed countries but also takes some emerging markets risk. 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 stepped down as lead manager of the fund on 1 November 2020 but remains as co-manager, working three days per week. Chris Hiorns took the reins as lead manager and has worked with Hepworth for nearly 25 years. The managers continue to be supported by EdenTree's wider Investment Team, which includes a range of equity and fixed interest specialists.

Hiorns and Hepworth share a similar investing philosophy. They prefer to invest in companies that have been overlooked by other investors, and pay an above-average yield. Hiorns continues to implement the same investment process, which involves investing in companies that other investors ignore – possibly because something's gone wrong, or the company's in an unfashionable area – also known as value investing. Whatever the reason, the setback must be temporary and there must be clear potential for improvement. He also adjusts the fund's exposure to shares and bonds depending on his outlook for the economy, and aims to provide a high and growing income. We believe the fund is 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 20 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 chooses 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. 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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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.

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