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. 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 focus on 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.
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.
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 we think 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 easy 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.
Over the past year, global stock markets were a mixed bag, but all were volatile. The US continued to be the world's strongest-performing major market, though most funds investing there don't tend to offer much in the way of income and focus on growth. Higher-risk emerging markets also performed fairly well.
The UK stock market wasn't so lucky. It was held back by the shares of small and medium-sized companies that tend to be more sensitive to the health of the economy. They were shunned by investors who worried about the impact of the UK leaving the EU.
Global sectors - one year performance
Past performance is not a guide to the future. Source: Lipper IM to 30/08/2019
Bond markets generally delivered superior returns. Bonds are often seen as a safe haven during times of uncertainty, and investors piled in amid concerns about Brexit, a US-China trade war, and weaker global economic growth.
It means bond yields are even lower than they were a year ago though. This is because yields and prices are inversely related – as bond yields rise, prices fall, and vice versa.
Bond sectors - one year performance
Past performance is not a guide to the future. Source: Lipper IM to 30/08/2019
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. Remember yields are variable and not guaranteed.
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 some 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 diversify an income portfolio focused on shares.
|Yields of various asset classes (%)|
|Global high yield bonds||5.6|
|Emerging market bonds||5.3|
|European high yield bonds||3.3|
|UK corporate bonds||2.2|
|UK government bonds||0.6|
Yields are based on past income, so they aren't a reliable guide to future income. Source: HL as at 31/08/2019
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 share and bond markets, including higher-risk emerging markets.
Robin Hepworth invests in unloved companies from across the globe. If they return to favour, their share prices could rise and boost growth. In the meantime, the fund collects the dividends they pay, with the aim to pay investors a regular income. This investment style’s been out of favour with investors in recent years, and means the fund’s underperformed 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 80% of the fund is currently invested in shares. The rest is invested in bonds and cash, which could provide some stability if stock 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.
The fund hasn't performed as well as the IA £ Strategic Bond sector over the past year. Alex Ralph has avoided some better-performing, higher-quality bonds, issued by companies that don't tend to be affected as much by how the broader economy's doing. She also tends to avoid bonds that are more sensitive to interest rate changes. Lately they’ve done better than the less sensitive ones she normally invests in.
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 broadly in line with its peers over the past year, though long-term performance has been excellent. It’s a more adventurous option, 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.
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 fund's managers mainly invest in dividend-paying companies in the UK, but they have some flexibility to invest overseas too. The flexibility to invest in smaller companies adds risk. 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 doesn't grow, or falls, over time. The fund’s had a tough time over the past year, held back by the managers' value style of investing that's remained out of favour with many other investors. This isn’t a guide to future returns though.
This fund mainly invests in emerging market government and corporate bonds. It can also invest in emerging market currencies. A focus on developing economies, and the ability to invest in high yield bonds and derivatives, makes this fund higher risk.
Bonds issued by emerging market governments and companies tend to offer higher yields than those offered by countries in the developed world. This compensates lenders and investors for the extra risk they're taking – governments and corporations in this part of the world are more likely to default on their debts or be affected by a less stable economic and political backdrop. Emerging market bonds have performed well recently, so yields aren’t as attractive as they were. They still offer relatively high yields though, so they could be considered by those able to accept greater levels of volatility in the search for a higher income. They should only make up a small portion of a wider portfolio though.
This fund is run by Claudia Calich – a skilled bond investor, part of the highly-regarded bond team at M&G. We think she takes a sensible approach to investing in this part of the market, and like that she has the support of an experienced team. She's built a good track record since taking over this fund at the end of 2013, though we'd like to keep an eye on it for a while longer before considering it for the Wealth 50.
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.