The extra flexibility of funds in the UK Equity & Bond Income sector should help protect capital and boost income while markets are highly volatile, the latest FE Trustnet study shows. 

With the enduring popularity of UK Equity Income, the UK Equity & Bond Income sector has been largely overlooked. Inflows into the sector stood at just £4m in April, according to data from the IMA, while UK Equity Income experienced net retail sales of £136m. 

The 41 funds that make up the UK Equity & Bond Income sector aim for a yield that is 120 per cent or above that of the FTSE All-Share index. While the sector is unloved, there is little to choose between it and its larger UK Equity Income rival in terms of performance. 

FE data shows that UK Equity Income has the better record over three and 10 years but UK Equity & Bond Income wins out over one and five years. 

Performance of sectors over 10-yrs

Name	1-yr returns (%)	3-yr returns (%)	5-yr returns (%)	10-yr returns (%)
IMA UK Equity & Bond Income	0.29	36.88	3.09	61.39
IMA UK Equity Income	-0.27	42.19	-4.18	70.97

Source: FE Analytics

Critics say that UK Equity & Bond managers are not specialised enough to manage their portfolios with the expertise of a dedicated equity or bond manager.

"We tend not to use the sector because it falls between two stalls," said AWD Chase de Vere’s Patrick Connolly.

"We recommend our clients look to hold the best equity managers for their equity exposure and the best bond managers for their fixed income exposure." 

However, it is frequently argued that the majority of equity income funds are invested in the same handful of equities, opening themselves up to stock-specific risk. 

Funds in UK Equity & Bond Income have the freedom to split assets between fixed income securities and shares, depending on where the manager sees opportunities, which gives them more opportunities for diversification. 

The considerable advantage that UK Equity & Bond Income has in the context of the current investment climate is that it is significantly less volatile.

An annual score of 12.91 per cent over the last five years compares with 16.53 per cent from UK Equity Income. 

In these uncertain times, investors shouldn’t overlook the value of a manager who can take the decision to sell risky equities in favour of bonds. 

Our data shows that for this reason funds in the UK Equity & Bond Income sector tend to narrowly underperform UK Equity Income funds in rising markets but significantly outperform in falling ones. 

Year-on-year performance of sectors

Name	2012 returns (%)	2011 returns (%)	2010 returns (%)	2009 returns (%)	2008 returns (%)
IMA UK Equity & Bond Income	3.03	-1.52	12.89	19.43	-23.35
IMA UK Equity Income	3.66	-2.9	14.58	22.88	-28.54

Source: FE Analytics

There are a number of highly-rated options for investors who want access to this unloved sector.

The standout performer is FE Alpha Manager Robin Hepworth’s Ecclesiastical Higher Income fund. Our data shows that it has returned 26.86 per cent and 117.46 per cent over the last five and 10 years respectively, more than any other fund in the sector.

Returns of 40.13 per cent over the last three years also compare favourably to the 36.88 per cent from the average fund in the sector. 

Jupiter High Income also has a good record. The £515m fund is headed up by industry stalwart Anthony Nutt and FE Alpha Manager Ariel Bezalel. It has a yield of 4.7 per cent and has returned 89.71 per cent over the last decade. 

Performance of funds vs sector over 10-yrs



Source: FE Analytics

Threadneedle Monthly Extra Income is also a good bet for income seekers. The yield is 4.3 per cent and returns of 48.63 per cent over three years put it second in the sector.

Alasdair Ross and Richard Colwell had three quarters of the portfolio invested in equities at 31 May. The fund’s 1.4 per cent TER is also highly competitive for a multi-asset portfolio.