The widely documented global chase for yield, not least caused by paltry interest rates, has meant that investors of all shades have been forced to raise their risk tolerances and seek income from further afield.
As such, the usually more reliable areas of income have become excessively popular, resulting in many cases with markedly compressed yields. To gain a reasonable yield in today’s world is therefore rather more difficult than it once was, and to do so whilst ensuring an appropriate level of diversification even more so.
An investor’s investment choices critically depend upon what outcome is ultimately required from their portfolio. If the desire is a high but reliable income stream then yield, on its own, is not always an accurate measure, as it will fluctuate based on the capital value of the underlying investments.
Therefore, if an investor has a perpetual or extremely long time-horizon, then the absolute value of a portfolio at any one time is rather immaterial. As such the income-seeking investor’s focus should be on picking funds whose absolute level of income – i.e. the monetary amount actually received, rather than the quoted yield – is more reliable and sustainable.
With this in mind, we have highlighted a number of higher yielding strategies where we believe there is a clear focus not only on yield but also upon the absolute levels of income and income distribution.
Henderson Preference & Bond – Yield: 5 per cent
This fund can invest across the fixed income spectrum though tends to have a focus on corporate bonds.
It is therefore likely to perform strongly when these markets are rising, but this can be at the expense of performance in falling markets.
It may be suitable for investors seeking a high but sustainable level of income, with a focus on capital preservation over the market cycle, but who are prepared to accept a degree of capital volatility, particularly over the shorter term.
Artemis High Income – Yield: 5.6 per cent
This fund is an amalgamation of bonds and equities, with the desired split, under normal market conditions, being 80 per cent bonds and 20 per cent equities. The managers have proven their ability, over the years, to manage this mandate through various market conditions.
Performance of fund versus sector over 10yrs
Source: FE Analytics
The fund may be suitable for investors who wish to access a relatively high income stream, though are willing to weather fluctuating capital value.
Kames High Yield Bond – Yield: 5.5 per cent
The awareness of risk at every part of the investment process behind this fund is reassuring, and the dynamic nature of the strategy allows it to take advantage of a variety of opportunities in the market.
This fund is likely to be suitable for investors who require a relatively high level of income, above that available on investment grade corporate bonds, with some potential for future growth. However, this is a strategy not without risks and the capital values will vary over time.
Schroder Income Maximiser – Yield Target: 7 per cent
This is not a typical equity income fund for there are two elements to it. Firstly it invests in a range of higher yielding UK shares to form a portfolio typical of traditional equity income funds.
The second element involves selling call options on the shares in the portfolio. Through these options, the manager of the fund consents to sell the shares at an agreed price some time in the future (typically three months hence). In return, the fund receives an up front payment, referred to as the premium.
The options overlay strategy is a complex one but the fund objective is simple. We believe that the managers have structured an interesting proposition that may be of interest to investors requiring high yields.
Income earned on £10,000 since fund’s launch
Source: FE Analytics
Investors should recognise that what you gain on the swings, you are likely to lose on the roundabouts; in this situation, income will be higher and capital gains lower.
Threadneedle UK Equity Income – Yield: 3.9 per cent
The managers are looking to generate a high dividend income that is expected to grow over time. Threadneedle have a strong and highly regarded UK equity team and two of the senior members of this team have responsibility for this fund.
This is a sensibly run UK equity income fund that has a bias towards larger companies.
The managers seek to build a portfolio with an above average yield, and as a result the portfolio holds positions in less fashionable parts of the market where higher dividend yields are available.
CF Woodford Equity Income – Yield: 4 per cent
This fund through a combination of income, dividend growth and capital appreciation, looks to achieve high single digit total returns per annum over the long term.
Integral to the strategy, given its focus on income and income growth, companies are carefully examined to ensure their cash flows, earnings and dividends are sustainable and reliable.
Performance of fund versus sector and index since launch
Source: FE Analytics
Though this UK equity income fund was launched in June 2014 its manager, Neil Woodford, has been managing investments since the late 80s and he has a wealth of experience to draw upon.
Evenlode Income – Yield: 3.69 per cent
The managers seek to hold a portfolio that yields more than the FTSE All Share index and invest in companies that can grow their dividends faster than the market.
In simple terms, the managers are looking for minimum dividend growth in excess of inflation.
The managers will invest in companies that can deliver sustainable growth and avoid the more cyclically sensitive areas of the market (for example commodities-related stocks and certain financials) that can be subject to more variable dividend payments.
Saracen Global Income & Growth – Yield: 3 per cent
As the team's emphasis is upon revenue, profits and dividend growth rather than solely high yielding companies, the fund may well have a lower headline yield than many of its global equity income peers.
However, because of this it also has the ability to generate strong income growth over time. There is a clear and understandable modus operandi in place, with the team aiming to invest in global leaders that have the propensity to continue to grow over the next five years.
However, they balance this with a focus on the risks to the investment case and they will not invest if the worst-case scenario appears too bleak. Although the fund itself has a relatively short life the team behind it have many years of experience to draw upon.
Performance of fund versus sector and index since launch
Source: FE Analytics
For investors seeking a proposition focused more on a growing income stream rather than just income, companies with sustainable long term growth potential and capital protection through the avoidance of riskier business models then this is a fund definitely worth considering.
Newton Asian Income – Yield: 4.44 per cent
More companies are now paying dividends in Asia and the region is becoming an increasingly rich source of income.
This is an equity income fund where the manager is looking for distributions to grow in line with the fund's capital appreciation and for the fund's dividend yield to remain broadly constant over time.
BlackRock Continental European Income – Yield: 3.81 per cent
This European (ex UK) equity fund seeks to provide a reliable and growing income stream while delivering outperformance of the fund's FTSE World Europe ex UK benchmark index on a rolling five-year view.
Performance of fund versus sector and index since launch
Source: FE Analytics
The fund invests in two types of stocks - around 60 per cent is held in stocks that yield more than the market with the remainder held in names that are currently lower yielding companies but the managers believe there is potential for dividend growth.
In seeking both types of companies the managers have a preference for perceived higher quality names that are attractively valued. The fund's current yield is comfortably ahead of the benchmark.
Andrew Johnston is an investment research analyst at Square Mile Investment Consulting & Research. The views expressed above are his own.