How to maximise your income returns

Brian Dennehy, managing director at FundExpert.co.uk, highlights the various options available to investors looking to prop up the disappointing yields they are currently receiving from cash.

By Brian Dennehy, FundExpert.co.uk
Friday June 08, 2012

For investors looking for yield, the first step away from cash deposits should be investment-grade fixed interest funds. These include M&G Corporate Bond, which is yielding 3.77 per cent, and Fidelity Moneybuilder Income, which has a yield of 3.95 per cent – around 1 per cent more than the best cash ISA rates.

High-yield bond funds can also provide a source of income, with Kames High Yield Bond, for example, offering a payout of 6.40 per cent.

It is, of course, important to remember that the capital value of high-yield bond funds tends to follow the sentiment of the wider economy – but a good fund manager should be able to hold the payout if further turbulence lies ahead.

Investors who are comfortable with greater capital volatility could look to equity income funds, but they must learn to focus on payouts rather than obsess over day-to-day movements in capital values.

UK equity income

It is important to focus on funds with a good track record of payout growth, such as JOHCM UK Equity Income, which is currently yielding 4.60 per cent.
Payout growth doesn’t have to mean every stock in a fund must grow its yield. A significant proportion of growth in dividends is coming from businesses “normalising” dividend payouts.
Schroder Income [4.52 per cent yield] looks to exploit the latter opportunities, which help smooth payout growth for the fund as a whole.
There are some outstanding UK equity income funds, but to invest solely in the UK is to miss out on some fantastic potential globally.

Asian equity income

We believe the greatest opportunities lie in Asia – not only because of greater profit growth (in the long-run dividend growth must be driven by profits growth), but also because companies in the region are accumulating cash much quicker than they are paying out dividends. They also have much less debt than UK companies and regulatory changes will encourage higher dividend payouts.
However, we have been told by one fund house with an Asian income fund that there is very little demand for Asian equity income from UK retail investors. Almost all of the demand is coming from discretionary managers, funds of funds and institutions.
The total fund size of the retail UK Equity Income market is £57.5bn, compared with £2.4bn for the Asian equity income market. Or, to put it another way, each of the top-five UK equity income funds are individually larger than the entire Asian income market.

Investors may avoid Asia because of perceived risk but it is clear they are missing out. Assume a UK equity income fund will increase payouts by 5 per cent per annum, and an Asian fund by 10 per cent. Further assume the current yield on both is 5 per cent.

If a 60 year old had a £1,000 payout that grew at 5 per cent a year, it would grow to almost £2,080 by the time they reach 75. However, if the payout had grown at 10 per cent, then by age 75 they would be receiving £4,180 – or twice as much.
This staggering differential desperately needs to be grasped by UK investors and their advisers.
We still believe one of the great surprises of this decade will be the extent to which UK pensioners are increasingly reliant on income generated in Asia.
In our opinion, investors should consider Newton Asian Income, which is currently yielding 5.21 per cent

High-yield opportunities in Europe

As for European funds, the high yields are reflective of the fall in capital values. For those who really want European exposure then Ignis Argonaut European Income has a strong income focus and a yield of 5.30 per cent. But investors must not solely focus on current yields. It is also a question of whether that yield is sustainable.

Finance directors have the propensity to cut payouts amid crisis conditions. In 2008 and 2009 this tendency was most pronounced in Europe. Rather than utilising cash piles in lieu of cut credit lines, most continued to accumulate even more cash. Do not be surprised if this repeats itself if the euro crisis again escalates.

Brian Dennehy is managing director of FundExpert.co.uk. The views expressed here are his own.

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JB Jun 11th, 2012 at 03:45 PM

Try an Asian income focused investment trust such as Henderson Far East Income, rather than a unit trust. The lower fees involved will magnify the compounding effect if you are after long term growth via reinvestment, with the option to 'switch on' the dividend stream (currently over 5%) when finally needed.

IFA Jun 10th, 2012 at 12:41 AM

I wouldn't trust anything with artificial yield enhancement. Look at the effect of income taken on Schroder Income Maximiser!! Down 25% since launch in 2005! Approach with caution.

Robert Jun 09th, 2012 at 11:57 AM

A year ago I was looking for monthly income funds, and came across the Insight UK Equity Income Booster fund which had an impressive yield of around 8% I decided not to go with it, as it sounded too good to be true, but 12 months on the yield is still the same. Still cant decide whether its worth switching in.

Paul Jun 09th, 2012 at 08:41 PM

Insight generate the income on this Fund by writing covered call options; this is reasonably straightforward in the UK market. If you're prepared to give away some upside in total returns if markets rise sharply, and income is a priority, this Fund is ideal.

Ilmarinen Jun 08th, 2012 at 06:06 PM

It would have been - would be - interesting to hear about a more extensive list if pissibolities including other emerging market income funds.

Theo Jun 08th, 2012 at 05:08 PM

Very sound and useful comment from Fund Expert. I agree with every word and I hope we shall hear more from them.

I too have read this Co's website and was quite impressed. They have developed their own system of identifying the funds with the greatest short term performance, based on momentum, a well known method, used by many stock market professionals. The method is transparent and clearly described there, with the results of back testing. You either take a good view of it and try it out at very little if any cost, or you leave it and go to the meaningless waffle and double talk of the likes of HL, Bestinvest etc.

Virtually all IFAs keep repeating the FSA requirement that past performance is no guide to the future, but all their recommendations are for exactly those funds. Is it any wonder that most fund investors are disillusioned and hardly any of them find it worth while paying for advice?

Any Co. that proposes a new method is to be praised and the least we can do is to keep an open mind and judge by results.

IFA Jun 08th, 2012 at 03:40 PM

Do not trust this guy. I have checked the website and there are dozens of decent funds which his firm recommend you sell. It is horrendous!

IFA Jun 08th, 2012 at 06:01 PM

M&G Optimal Income-Sell
M&G Strategic Corporate Bond-Sell
M&G Recovery-Sell
Jupiter Merlin Income-Sell
Fidelity Strategic Bond

This was just a few of the funds Dennehy thinks you should sell. Sorry, it's not advice on the website, it's guidance. It states to sell Jupiter and buy JPM Multi Asset Income, which has less than 3 years track record. it's shameful what. This website is guiding people on, have a look for yourselves. I bet if it were around in 2010 it would have said sell Invesco Perpetual High Income as well. Short term performance chasing is a mugs game. Pick an IFA who knows what they are doing and sees you every 6 months to review.