Seven of the 10 highest yielding funds across the IMA Mixed Investment sectors sit in this category, with the other two funds sitting in IMA Flexible Investment.
Only one fund in the more cautious IMA Mixed Investment 0-35% sector made it into the top-10 – Investec Diversified Income – while no funds in the IMA 40% - 85% sector ranked highly from a yield perspective.
Source: FE Analytics
Each of these funds have a higher yield than the average fund in the IMA UK Equity Income sector, and have also been more effective at protecting investors’ capital over the medium to long-term.
John Stopford’s Diversified Income fund has a max drawdown, which measures how much an investor would stand to lose if they bought and sold at the worst possible times, of just over 20 per cent over the last decade. By contrast, the IMA UK Equity Income sector average has a drawdown of more than 44 per cent.
Those looking for a steady and high dividends but who don’t want the risk of equities, may wish to consider an income-focused fund that sits in these multi-asset sectors.
These products have long been popular in the US, but have only recently started to gain traction on this side of the pond.
While a high yield is a good starting point for income-hungry investors, it doesn’t necessarily mean the fund has or will pay out the most income over time.
Indeed, a high yield can sometimes occur because of a steep period of capital depreciation – not a high level of dividends.
Of the top-10 highest yielding multi-asset funds, the five-crown rated TB Wise Income portfolio has paid out the most in income over the last five years – £405.31 on an initial investment of £1,000.
F&C MM Navigator Distribution paid out £336.46, followed by the CF Seneca Diversified Income fund, which paid out £331.95.
Income earned over 5yrs
Source: FE Analytics
Several funds in the list, including Franklin Diversified Income and Schroder Managed Monthly High Income, do not yet have a five year track record.
The TB Wise fund, run by Wise Investment founder Tony Yarrow, aims to be a ‘one-stop shop’ fund for investors look for an attractive level of income from a wide variety of asset classes, including bonds, equities, investment trusts, government bonds and cash.
It’s a highly concentrated portfolio of 30-40 holdings and takes a high-quality approach, which has been out of favour of late.
Yarrow has 68 per cent invested in equities, but has the flexibility to increase this to 100 per cent given the fund sits in the IMA Flexible Investment sector.
However, the manager tends to retain a diversified portfolio, not having more than three quarters of his assets in equities since 2011.
Property tends to have a sizeable weighting, ranging between 14 and 25 per cent over the past three years.
Unlike many of its high-yielding rivals, the tiny £43.9m fund has also consistently beaten its peers, outperforming the IMA Flexible Investment sector average over one, three and five year periods.
It is also ahead of all of the other funds on the high-yielders list over these periods. Since its launch in October 2005, the fund is up 65.21 per cent while the sector has returned 52.44 per cent.
Performance of fund vs sector since launch
Source: FE Analytics
As a go-anywhere multi-asset portfolio, the fund has no constraints on where it can invest and how much it will have in a given asset class.
This flexibility has helped the fund outperform strongly in rising markets, though in the down markets of 2011 the fund also protected effectively on the downside.
This has not always been the case however, so investors cannot expect the fund to weather all storms. In the crisis year of 2008, the fund lost 30.07 per cent while its peers were down 26.11 per cent.
Wise is predominantly a fund of funds, but does have some direct equity and bond exposure. Top-10 holdings include JOHCM UK Equity Income, the Standard Life Property fund and GlaxoSmithKline.
The highest-yielding multi-asset fund – Scottish Widows HIFML Diversified Income – has just £9.7m in assets under management.
Over the last five years, it’s paid out £323.17 in income, so it’s not far behind the leaders. On a total return basis however, it has tended to underperform other funds in the sector.
Performance has picked up recently; over the last six months, the fund has nearly doubled the returns of the sector and is well ahead of its cash index – LIBOR LIBID GBP 3m.
For those looking for something a little more established, multi-asset duo Gary Potter and Rob Burdett’s £933m F&C MM Navigator Distribution fund aims to provide income in conjunction with capital growth.
The four-crown rated fund has outperformed other funds in the sector over one, three and five years, returning over 10 percentage points more than the sector over the latter period.
The five-crown rated Invesco Perpetual Distribution fund also stacks up well from both a total return and income basis.
The fund is yielding 4.42 per cent and has returned a solid 118.93 per cent over the last decade.
Though the £3bn Invesco fund still benefits from the expertise of fixed income star managers Paul Causer and Paul Read, the equity portion of the portfolio was previously run by Neil Woodford, who recently left the firm and launched his own equity income portfolio – CF Woodford Equity Income.
The equity portion of the fund is now managed by Ciaran Mallon.
The fund aims to achieve a combination of income and capital growth over the medium to long term and is able to use fixed income, equities, cash and other financial instruments to achieve this.
Like the enhanced income portfolios in the IMA UK Equity Income sector, the fund is able to use both long and short positions to take advantage of rising markets and also capture gains in more volatile periods.
Over the last five years, the fund has paid out an income of £330.63 on an initial investment of £1000.
The fund also pays out income monthly so it’s a good choice for investors who need a steady monthly income.
In spite of Woodford’s exit, Distribution is a favourite with the FE Research team, who include it in the FE Select 100.
