It is not only the UK that has seen this trend: rising equity and bond prices have seen yields compress across the globe and particularly in the developed world.
There are, however, an elite group of funds that have managed to maintain a healthy dividend yield. Here are some standout examples.
Equities
Funds that use call-options generate additional income from existing investments, propping up the dividend yield. The likes of Insight Equity Income Booster, which is currently yielding over 8 per cent, Schroder Income Maximiser, which is yielding almost 7 per cent, and Michael Clark’s Fidelity Enhanced Income fund, which is yielding 5.2 per cent, all use these instruments.
The big drawback of call options is that they sacrifice capital growth potential, meaning that the funds that use them often underperform in rising markets.
Both the Fidelity and Insight funds have significantly underperformed their sector as well as the FTSE All Share over the last year, though Thomas See’s focus on mid caps and cyclical stocks has helped the Schroders fund keep up with the surging market.
Performance of funds, sector and index over 1yr
Source: FE Analytics
Anyone who prefers to invest in a more conventional fund has a few options to consider. Clive Beagles’ JOHCM UK Equity Income fund is yielding a healthy 4.6 per cent, well above average for a UK Equity Income fund.
The manager’s overweight in mid caps has helped prop up the yield: top-10 positions include FTSE 250 company Segro, which is currently yielding 4.62 per cent according to Bloomberg.
As well as being a high yielder, the fund has one of the best total return records of recent times, boasting top-decile figures over one, three and five years.
Source: FE Analytics
Newton Higher Income cut its yield target recently due to concerns over its ability to generate total returns, but it still offers an above-average payout, currently at 4.5 per cent.
Liontrust Income’s recent change in style, which has seen it move into the IMA Global Equity Income sector, has given it a wider scope of companies to choose from to prop up its yield. FE data shows that it is currently yielding 4.6 per cent – the highest figure in its sector.
Again, it has a bias towards mid caps, with Restaurant Group and Go-Ahead Group its two biggest holdings.
Threadneedle Global Equity Income – a four crown-rated fund and a top-quartile performer in its sector since launch – also has a healthy yield, at 4.5 per cent.
Bonds
Bond managers have found it even more difficult to generate a healthy level of income, thanks to historically low yields across the corporate and government debt markets.
Even high yield managers have struggled to generate a yield in excess of 5 per cent. As one fund manager told FE Trustnet recently: "There’s no such thing as high yield anymore – just not-as-low yield."
Some high-profile fund managers have managed to buck the trend, though. The Jupiter Strategic Bond fund, run by FE Alpha Manager Ariel Bezalel, currently boasts a yield of 5 per cent. His overweight exposure to Cypriot and Greek government debt has helped keep this figure well above inflation.
Another high yielding bond fund operating in the IMA Sterling Strategic Bond sector is Royal London Sterling Extra Yield Bond, which is currently paying out 6.82 per cent.
The £853m fund, which is a favourite with Hargreaves Lansdown’s Mark Dampier, is more volatile than the average bond portfolio, but has managed to deliver strong capital growth and returns in the last year or so, which has been a very difficult time for fixed interest.
Performance of funds and sector over 1yr
Source: FE Analytics
The increasingly popular five crown-rated PFS TwentyFour Dynamic Bond fund is another high yield option, boasting a figure of 6.6 per cent, according to FE Analytics.
Partner at TwentyFour John Magrath recently told FE Trustnet that the fund’s relatively small size has allowed it to get access to bonds that multi-billion pound vehicles cannot hold. This, he explains, is how the fund has managed to maintain such a high yield.
Other bond funds with a yield in excess of 5 per cent include the five crown-rated Artemis High Income fund and £1.1bn Henderson Strategic Bond portfolio.
Click here to learn more about bonds, with the FE Trustnet guide to fixed interest.
Multi-asset
Multi-asset funds that focus on income are gaining more and more traction in the UK, which has been helped by concerns over the fixed interest market.
Few funds in the IMA universe are currently offering inflation-busting yields however, with only 14 across the three Mixed Investment sectors and Flexible sector paying out more than 4 per cent.
One such example is FE Alpha Manager Tim Wilson’s Newton Managed Income portfolio – a fettered fund of funds that holds the likes of Newton Asian Income and Newton Higher Income.
Wilson’s five crown-rated fund is currently yielding 4.38 per cent. It is a top-quartile performer in its IMA Mixed Investment 20%-60% Shares sector over three and five years.
Tony Yarrow’s £31m TB Wise Income fund may not be the largest, but it packs quite a punch in terms of yield and total return record.
The five crown-rated fund is currently paying out 4.7 per cent and is a top quartile performer in its IMA Flexible Investment sector over almost every time period possible.
Performance of fund vs sector over 5yrs
Source: FE Analytics
It is also a fund of funds. It counts Standard Life UK Property and JOHCM UK Equity Income in its top-10.
For anyone who is a fan of the Schroder Income Maximiser range, the Schroder Managed Monthly High Income fund – which holds a mixture of Thomas See’s portfolios – is an option. It has a yield of 5.8 per cent, and pays out its dividend to investors every month.
