Michael Hasenstab’s $10bn Templeton Emerging Markets Bond fund paid out the most money in income to its investors over the course of 2018, according to FE Trustnet research. 
While 2018 saw losses in most parts of the markets because of tighter monetary policy and global trade tensions – resulting in many funds taking a hit when it comes to capital growth – plenty of funds were able to generate income for their investors.
We looked across the entire Investment Association universe and ranked funds according to their income payouts on a £10,000 investment made at the start of 2018. Sitting at the top of the list was Templeton Emerging Markets Bond, with its distribution of £947.
Price performance and total return of fund in 2018
Source: FE Analytics
The fund, which has a historic yield of 11.37 per cent, made a 15.43 per cent loss in capital terms last year but – as the chart above shows – this was moderated to a 6.33 per cent fall by its robust income payout.
Run by bond veteran Michael Hasenstab alongside Laura Burakreis and Calvin Ho, the Templeton Emerging Markets Bond fund has a benchmark-agnostic approach with a contrarian bias that sees the managers look for opportunities in unloved or illiquid markets.
The portfolio currently has significant overweights to Argentina, Brazil and India; it also has more than 20 per cent in cash. The majority of emerging market bonds owned in the portfolio are in local currencies.
In his emerging market debt outlook for 2019, Hasenstab said it will be important for bond investors to seek out countries that are best placed to deal with the higher interest rates now in place at the US Federal Reserve.
“In 2019, it will be increasingly important to identify countries that offer idiosyncratic value that is less correlated to broad-based beta (market) risks, in our view, as rising rates in the US should impact individual countries in starkly different ways,” he said.
“Countries with low rate environments, or large structural imbalances and economic soft spots, could be vulnerable to external rate shocks. However, countries with stronger economies, balanced current accounts and relatively higher yields should be in a stronger position to absorb rate shifts of 100 basis points or higher.”
Source: FE Analytics
As the table above shows, L&G Dynamic Bond came in second place with a payout of £827.76 on an initial investment of £10,000. It has a historic yield of 8.86 per cent.
The £260.6m fund is managed by Shahzada Omar Saeed and resides in the IA Sterling Strategic Bond sector. While it made the Investment Association universe’s second highest distribution in 2018, its aim is to provide investors with a combination of growth and income; that said, it has made a total return of just 2.09 per cent over the past five years.
Giving his outlook for 2019 at the end of last year, Saeed said: “Valuations have corrected a long way in a short period of time, and it is therefore possible for markets to recover somewhat should macro conditions stabilise, particularly if the Fed offers some verbal support.
“But a significant increase in corporate bond issuance is likely at the start of 2019. We’d therefore expect things to get worse before global central banks turn on their support once again and markets are able to rally sustainably.”
UBS Global Enhanced Equity Income was the equity fund to pay out of the most income to investors in 2018. It distributed £788.27 on an initial £10,000 investment made at the start of the year; its historic yield stood at 8.07 per cent.
Headed up by Patrick Zimmermann, the £685.4m fund is a member of the IA Global Equity Income sector. It invests in both developed and emerging market stocks that the manager believes to have the potential to deliver dividend income and long-term capital appreciation, with covered calls used to boost the portfolio’s income stream.
A number of other ‘enhanced income’ funds can be found on the list of 2018’s biggest income payers. These include Schroder Income Maximiser (£757.30 on an initial £10,000), Insight Equity Income Booster (£749.78), Premier Optimum Income (£672.18) and Fidelity Enhanced Income (£644.38).
Of the 30 strategies we’ve highlighted above, Michael Kerley and Sat Duhra’s Janus Henderson Asian Dividend Income fund is the only equity fund that doesn’t use covered calls to enhance its payouts. The £129.3m fund was in the IA Asia Pacific Excluding Japan sector’s top-quartile last year thanks to the defensive nature of income portfolios.