For people like these, UK Equity Income funds offer the best of both worlds, so long as income is re-invested.
For example, Neil Woodford's (pictured) five crown-rated Invesco Perpetual Income and High Income funds have returned more than 200 per cent to investors over the past 10 years, with yields of 3.67 per cent and 3.63 per cent respectively. Just as importantly, they have done this without taking on an excessive amount of risk.
However, many other funds in the sector have comfortably beaten the returns made by the FE Alpha Manager.
Here are three of them:
Unicorn UK Income
The five crown-rated Unicorn UK Income portfolio has returned 80.41 per cent over three years – the highest in the sector – with a yield of 3.38 per cent.
It has also surged ahead of the FTSE All Share, which has returned 32.68 per cent over this time.
Performance of fund vs sector and index over 3 yrs
Source: FE Analytics
The £83.9m fund is headed up by FE Alpha Manager John McClure (pictured) and is one of the most stable in the sector.
It has an annualised volatility of 11.22 per cent, behind the Trojan Income fund and the Fidelity Enhanced Income portfolio.Amandine Thierree, fund analyst at FE Research, likes the idea of a portfolio designed for income without FTSE 100 companies and says that so far it has been outstanding.
"This is partly due to John McClure’s background with small caps," she said.
"In terms of the level of income, it is certainly not the best fund to buy in the sector but its overall performance is strong and it has an underestimated strength: income diversification."
"Currently most of the UK Equity Income funds are invested in the same companies - listed in the FTSE 100 index - and the top-10 holdings represent a massive portion of the portfolios. Relying so much on a few stocks is dangerous and this has been stressed by some fund managers recently."
She adds that the fund’s small size means liquidity is not an issue as it is in many other funds in the sector.
"I like its capacity to rebound. Its underperformance does not drag it down too deep, but when it recovers it goes well beyond expectations," she said.
It requires a minimum investment of £2,500 and carries a total expense ratio (TER) of 1.59 per cent.
PFS Chelverton UK Equity Income
The tiny £45.6m Chelverton fund is invested further down the market cap spectrum than many of its peers and is fully invested in UK equities, leaving it well-positioned to take advantage of any rally in small to mid cap stocks.
Over three years, the fund has outperformed both the IMA Equity Income sector and the FTSE All Share, bringing in 67.98 per cent.
Performance of fund vs sector and index over 3 yrs
Source: FE Analytics
Its yield of 5.08 per cent is one of the highest in its sector.
Despite the strong total return and high yield, the Chelverton fund is only marginally more volatile than the Unicorn fund, with an annualised score of 11.5 per cent – one of the lowest in the sector.
Andy Merricks, head of investment at Skerritts Consultants, says the fund is an excellent alternative to the mainstream equity income funds out there and is particularly well-suited to bull markets.
"I like funds like this that are willing to go down the market cap a bit, not just the Woodford-style FTSE 100 stuff," he commented.
"The trade-off is more volatility than some of the others, but the portfolio looks well-diversified and the risk seems to be quite low. It will certainly see better capital performance at times of bull markets."
Merricks points out the fund was "hammered" in the falling markets of 2008 and 2009, but says it recovered reasonably quickly.
"In good times it will do well and if it continues paying a decent level of income, there’s nothing wrong with that, but during tough times it will take a bigger hit."
Merricks adds that the fund’s small size gives it scope to grow, while others in the sector are facing liquidity concerns.
The fund requires a £1,000 minimum initial investment and a top-up of £500. Its TER of 1.25 per cent means it is cheaper than the Unicorn fund.
Henderson UK Equity Income
FE Alpha Manager James Henderson heads up the £363.2m Henderson UK Equity Income portfolio, which is top quartile over one and three years, but second quartile over five and 10.
Over three years it has made 62.44 per cent. It is yielding 3.4 per cent.
Performance of fund vs sector and index over 3 yrs
Source: FE Analytics
However, the Henderson fund has taken on more volatility to achieve its total return, with a third-quartile figure of 15.75 per cent.
The fund has 39.1 per cent in industrial stocks, such as British automotive and aerospace components company GKN, and 29 per cent in financial holdings. Blue chips such as BP and GlaxoSmithKline feature in the fund’s top-10. Merricks says in terms of income the fund is not ideal, but he likes the fact that the manager is willing to search into small and mid cap companies for yield and return.
He adds that he owns the Lowland Investment Trust, also managed by Henderson, which invests with a similar style to the OEIC.
"I’d expect the funds to be up there in a bull run because they’re willing to go further down the market cap to get there," he said.
The fund requires a minimum investment of £1,000 and has a TER of 1.75 per cent.
However, he warns the sharp falls of all three portfolios in 2008 is “scary” and for investors not willing to take the risk, it may be best to stay out.
"In bad times liquidity dries up in a hurry. In an emergency, you’ve got to hope stocks hold up and these have come out looking quite well."