Income investors are being warned of threats to their dividend-stream, with bond managers being pushed into higher-risk investments to maintain yield, and an increasing number of experts saying that blue-chip UK dividend-payers are overvalued.

FE Trustnet looks at five income funds that have the ability to switch between asset classes to maintain their yield, allowing those investors who rely on their income to delegate the asset allocation decisions to the experts.

All funds – with the exception of the team-managed Aberdeen portfolio – are run by managers whose record of outperformance has been rewarded with FE Alpha Manager status, and all have five FE crowns.


Fidelity Moneybuilder Balanced

FE Alpha Managers Ian Spreadbury and Michael Clark’s fund is yielding 4.17 per cent, and has produced top quartile returns over both three and five years in the IMA Mixed Investment 40%-85% Shares sector.

Spreadbury has worked on the £268m portfolio since 1995, and data from FE Analytics shows that in that time the fund has made 265.86 per cent, while the sector has made 141.2 per cent.

Spreadbury is very bearish on the global economy, believing that the high levels of public and private debt will depress growth for many years to come.

In September FE Trustnet reported that he was negative on government bonds and increasingly worried about credit quality in corporate bonds.

He expects default rates to rise, and says this makes picking the right issuer more and more important.

Clark joined Spreadbury on the portfolio in December 2009. His five-crown rated Fidelity Moneybuilder Dividend fund has turned heads of late, topping the risk adjusted return standings over a three year period in its UK Equity Income sector.

The fund is available with a minimum investment of £500, and the total expense ratio (TER) is 1.21 per cent.


Aviva Distribution

FE Alpha Manager Chris Murphy has run this fund since April 2009. Since then, it is the second-best performer in the IMA Mixed Investment 20%-60% Shares sector, returning 70.64 per cent to investors.

Performance of fund versus sector over 5yrs



Source: FE Analytics

Murphy was joined in January 2011 by James Vokins, and their £87.4m portfolio is currently yielding 4.2 per cent, according to data from FE Analytics.

The managers have achieved the high returns without moving too far down the credit scale; 46.7 per cent of the fund is in investment grade credit, while only 5.7 per cent is in high yield bonds (those with a rating of BB or lower).

The fund’s annualised volatility over the past three years of 6.65 per cent is only slightly higher than the sector average of 6.09 per cent.

You will need a minimum investment of £1,000 to gain access and the TER is 1.38 per cent.

Invesco Perpetual Distribution

This fund, managed by FE Alpha Managers Paul Causer and Neil Woodford along with Paul Read, is currently yielding 5.85 per cent, significantly more than the popular Invesco Perpetual Income and High Income equity funds, which both yield under 4 per cent.

The high yield may be explained by the fact that 37.85 per cent of the fund is in high yield bonds – those which have a rating below investment grade, reflecting increased default risk.

The managers also see value in the bonds issued by UK financials, and their largest holding is a 6.22 per cent position in the paper of Lloyds Banking Group.

They have big positions in RBS and Barclays as well, and in their latest note to investors they say they still see value in the sector.

Performance of Invesco Perpetual Distribution versus sector over 5yrs


Source: FE Analytics

“In our view, the combination of structural and regulatory reform and rising capital levels should be supportive of subordinated bank debt for many years,” they wrote.

The fund is a top-quartile performer over five, three and one year periods, and the best-performing fund in the sector over the latter two timeframes.

It is available with a minimum initial investment of £500 and has a TER of 1.57 per cent.


Aberdeen Managed Distribution

This fund, yielding 3.2 per cent, is a consistent top quartile performer in the IMA Mixed Investment 20%-60% Shares sector. 

It offers the diversification of large holdings in infrastructure investment trusts, counting 3i Infrastructure and HICL Infrastructure among its top-10, and also invests directly in equities.

The portfolio has large holdings in a number of Aberdeen bond funds, and where it invests in another of the house’s products it rebates the lower of the two charges.

The fund has performed particularly strongly since the financial crisis, as FE Analytics data shows.

Performance of Aberdeen Managed Distribution versus sector over 5yrs



Source: FE Analytics

The minimum initial investment is £500 and the TER is 1.32 per cent.


Jupiter Merlin Income

The popularity of this multimanager fund has seen it grow to £3.9bn in size, although with a yield of 3.2 per cent it has one of the lowest coupons on this list.

It is currently roughly equally split between UK equities, fixed interest and "alternative investments", the latter including global and Asian income funds as well as a Physical Gold ETF.

As it is a multimanager fund the TER is high, at 2.33 per cent according to data from FE Analytics.

Our performance data includes the effect of this on returns, however, and it shows that the fund is a top-quartile performer over three, five and 10 years in the IMA Mixed Investment 20%-60% Shares sector. A recent study by FE Trustnet found that the fund has outperformed its sector average in 11 consecutive calendar years.

It is available with a minimum initial investment of £500.