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Which UK high income fund is best for you?

07 July 2014

FE Trustnet rates enhanced income funds across a number of different performance measures.

By Jenna Voigt,

Editor, FE Investazine

Though rustlings are growing louder in the market that interest rates are imminently on the rise, the likelihood of making a positive real return from cash in the near future is still slim.

For savers, finding a source of steady and sustainable income is vitally important, which is why a number of fund houses have rolled out income maxmising portfolios. These high income funds often use derivatives and ‘call and put’ strategies to boost their yield, thus increasing their dividend payouts.

Here, due to popular demand from our readers, FE Trustnet analyses how these funds stack up on an income and total return basis.

Funds like Schroder Income Maximiser, Fidelity Enhanced Income, Insight Equity Income Booster and the RWC Enhanced Income all offer investors a higher than average yield, but the trade-off is that these funds give up some of the capital appreciation offered by run-of-the-mill equity income portfolios.

The tiny Insight Equity Income Booster fund is the highest yielding fund in the IMA UK Equity Income sector at 8.61 per cent, followed by the Schroder Income Maximiser fund at 7.06 per cent. The RWC portfolio, which sits in the IMA Specialist sector is yielding 7 per cent and Fidelity Enhanced Income is yielding 6.25 per cent.

All have significantly higher yields than their peers in the IMA UK Equity Income sector. The average fund in the space is yielding just 3.93 per cent.

However, over the last 12 months, each of these funds has underperformed the FTSE All Share and IMA UK Equity Income sector on a total return basis, with the index picking up 12.74 per cent.

Performance of funds vs index and sector over 1yr


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Source: FE Analytics

However, the numbers look much better over the long-term for some of the funds. Over three years both the Schroder Income Maximiser and Fidelity Enhanced Income funds have beaten the index with returns of 36.46 per cent and 34.34 per cent respectively. Both funds have lagged the sector average, though.


Performance of funds vs sector and index over 3yrs

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Source: FE Analytics

The more cautious RWC Enhanced Income fund made 15.12 per cent over the period while the FTSE All Share gained 29.64 per cent, according to FE Analytics.

Part of the reason for RWC’s underperformance has been their hefty cash weighting, which currently stands at 25 per cent. Manager John Teahan recently explained why he’s letting cash drift up in the portfolio, and how the team are able to deliver a 7 per cent yield regardless.

The Schroder fund is the standout choice for total return investors, as it draws on the expertise of deep value managers Nick Kirrage and Kevin Murphy, who also run the top-performing Schroder Income and Schroder Recovery portfolios.

Schroder Income Maximiser uses the best ideas from both of these funds, and Thomas See then uses call options to help maximise the yield. The stocks tend to have a high potential for capital growth, with top-10 positions currently including Tesco, Morrisons and Friends Life.

The other funds in question tend to core quality stocks which have a lower potential for gains but also a lower volatility.

While some investors will prioritise total return, many of those investing in enhanced income funds do so purely for dividends. These products are popular with those in or approaching retirement, who rely on income on a monthly or quarterly basis.

When it comes to income, the Schroder and Fidelity funds come out similarly over five years. On an initial investment of £1,000 both funds have paid out an income of more than £400 – significantly more than the average UK Equity Income fund.

Schroder Income Maximiser is in the lead with £458.32, while Fidelity Enhanced Income has made £439.58 in dividends.

The Insight Equity Income Booster fund has been the standout leader however, earning nearly £54 more than the Schroder Income Maximiser fund and nearly £73 more than the Fidelity Enhanced Income fund. It also pays out dividends monthly, making it the obvious choice for investors who rely on income from their investments on a regular basis.

Income earned over 3yrs

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Source: FE Analytics

FE does not currently have income earned data for the RWC Enhanced Income fund, which is yielding 7 per cent.

Compare this to the average fund in the sector, which just so happens to be the index in the form of the Vanguard FTSE UK Equity Income Index fund.

The fund only distributes once a year, in November, so it hasn’t paid out a dividend yet in 2014. Still, at this point investors in even the lowest-yielding enhanced income fund has made £223 more.


Hargreaves Lansdown’s Richard Troue says enhanced income funds are good for investors who are in or near retirement because they deliver a high and steady level of income; however, he thinks investors with a longer term time horizon would be better served in equity income funds which growth both capital and income over time.

“These type of funds tend to be good for people who want high income now and are willing to sacrifice a little bit of capital in the future to achieve this,” he said.

“I tend to prefer a fund that grows capital and income over the long term, like Neil Woodford, who is replicating his strategy in the CF Woodford Equity Income fund. It doesn’t feel comfortable accepting lower capital growth just for more income now.”

However, for investors needing to live off a steady income in retirement, Troue says the portfolios are a sensible option.

For those using enhanced income funds in retirement, capital protection is a big priority. Capital growth is seen as something of a bonus to an investor of this type, as their time horizon is much shorter.

On this measure, the best performing fund by some distance is Michael Clark’s Fidelity Enhanced Income fund, which has the lowest max drawdown over a three year period. This measures how much an investor would have lost if they bought and sold at the worst possible times.

Our data shows that the fund has a max drawdown of 10.25 per cent over the period, while the Fidelity, RWC and Schroder portfolios have a figure of between 15.8 and 18.86 per cent. Clark’s fund also has the lowest volatility by some distance, and is therefore the obvious choice for particularly cautious investors.

FE head of research Rob Gleeson tipped Fidelity Enhanced Income as one of his favourite funds earlier this year.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.