However, the demographic mega trend showing the incremental move toward an older population –the number of people over the age of 65 in the UK expected to double by 2050 – suggests those investors who are looking for income will only grow over time.
However, with low interest rates, cash held in the bank can be easily eroded by inflation and so funds that can deliver a good, and more importantly, growing level of income are at the top of most investors’ buy-lists.
With that in mind and in the next article in this series, we look at funds Square Mile, the investment research firm and FE’s strategic partner, favoured funds for income growth.
Each fund mentioned is a member of the group’s “Academy of Funds” and has their highest AAA-rating.
CF Woodford Equity Income
While the £2.3bn fund is only a few months old, the fund’s ‘star’ manager Neil Woodford’s stellar 26 year track record as manager of the Invesco Perpetual High Income fund proves his new portfolio’s credentials, Square Mile says.
“This is a compelling investment proposition and one most worthy of consideration by long term investors. There is a clear and understandable investment process in place, which has been used by Mr Woodford for many years, and furthermore he is backed by an experienced and likeminded team as well as a committed parent firm.”
“Mr Woodford's investment track record is extremely impressive and though his contrarian nature can lead to periods where investors may require a dash of patience, he has proved time and again that this patience is ultimately a well-rewarded virtue.”
The fund has stayed ahead of its IMA UK Equity Income sector average since its launch at the beginning of June.
Performance of fund, sector and index since June 2014
Source: FE Analytics
“Fundamentally, Mr Woodford is focused on producing a positive, not relative, long term return for investors whilst providing a level of capital preservation, and so this fund should perhaps be judged versus this objective, and not against how the market has done.”
“Though, as an equity fund, it will still ultimately be at the mercy of investor sentiment in, or towards, its underlying asset class.”
CF Woodford Equity Income has an ongoing charges figure (OCF) of 0.75 per cent.
Invesco Perpetual Corporate Bond & Invesco Perpetual Tactical Bond
The £5.5bn Invesco Perpetual Corporate bond fund is one of the largest in the IMA universe, putting it squarely in the crosshairs of recent guidance from the FCA advising investors of the dangers of giant corporate bond funds in the face of rising interest rates.
However, Square Mile says a careful process from the fund’s three managers – Paul Causer, Paul Read and Michael Matthews – places particular emphasis on risk, generating good long term performance for the fund.
Although they warn investors can be periods where the fund's performance may differ substantially from that of the benchmark, and recommend holding the fund for a minimum of three years.
“The managers run this as a relatively high conviction strategy, and are not afraid to express their opinions through the fund's positioning when they see value in the market.”
Over the past five years the fund has returned 44.25 per cent compared to an IMA Sterling Strategic bond sector average of 41.36 per cent.
Performance of fund and sector over 5yrs
Source: FE Analytics
“Given the managers' focus on value, the fund is likely to have a slightly more volatile return profile than the benchmark, tending to outperform when the corporate bond market is rising, but underperform when it is struggling.”
The fund has one of the worst figures for max draw down in its sector over five years, whereby an investor buying in at the top and selling out at the bottom would have lost 8.35 per cent.
Our data shows that the managers have a good track record of growing their income stream, however, and have grown their net distribution in seven of the last 10 years.
Square Mile also recommends this other bond fund from the same group that is also managed by Causer and Read; the Invesco Perpetual Tactical bond fund.
At just £350m it is significantly smaller than Invesco Perpetual Corporate Bond fund but has many similar holdings with such as an overweight position in banks.
One of the most visible differences is its large cash holding, currently around 20 per cent of the portfolio compare to around 4 per cent in the Invesco Perpetual Corporate bond fund.
“This is a flexible mandate, and the managers have the freedom to invest across government and corporate bond markets worldwide. It can, at times, take large positions and could in theory be 100 per cent invested in, for example, government bonds or sub-investment grade debt,” Square Mile said.
“In reality it is likely to have positions in various markets, and will usually have a focus on corporate bonds.”
The fund was launched in February 2010 and it has outperformed its sector with returns of 36.02 per cent.
Performance of fund and sector over 5yrs
Source: FE Analytics
The Invesco Perpetual Corporate Bond & Invesco Perpetual Tactical Bond funds have an OCF of 0.66 and 0.75 per cent.
Jupiter Merlin Income Portfolio
This £4.4bn fund of funds is run by three FE Alpha Managers; Peter Lawery, Algy Smith-Maxwell and John Chatfeild Roberts.
The fund holds 16 funds in its portfolio with 44.82 per cent exposure to UK equities and 32.89 per cent in fixed interest.
It also has some exposure to commercial property and 7.33 per cent weighting to cash.
“The managers have proven their ability to assess the macro environment and build well-constructed portfolios. Their approach is pragmatic, and their asset allocation and fund selection will be flexed according to the opportunities.”
Over five years the fund has outperformed its sector, having returned 48.68 per cent compared to an average 38.06 per cent.
Performance of fund and sector over 5yrs
Source: FE Analytics
However, Square Mile note investors should remember the large size of the fund, which could present liquidity problems but says the experience of the managers and the nature of their approach reduces their concerns.
“The managers are acutely aware of the cautious objectives of the underlying investor base for this fund and this underpins the team's investment philosophy that preserving capital is just as important as capital growth.”
Their top 10 holdings include M&G Global Dividend, Royal London UK Equity Income, M&G Strategic Corporate Bond and Invesco Perpetual UK Strategic Income.
Jupiter Merlin Income Portfolio has an ongoing charges figure of 1.6 per cent.
