Income is becoming an endangered species in the current climate, becoming difficult to find, even harder to keep hold of let alone even grow.
With banks and building societies’ current accounts offering next to nothing due to interest rates now being at 0.25 per cent, and with inflation at 0.6 per cent, cash deposits are offering very little.
As such, savers are having to move into riskier assets in order to make a return on their capital, but knowing where to put it to get the best return for the lowest risk can be difficult.
So what can investors do? Below, Darius McDermott, managing director of Chelsea Financial Services, looks at some funds those savers may wish to consider.
Traditionally inflation can be a problem for bonds as the income they pay is usually fixed at the time they are issued.
To counter this, McDermott (pictured) suggests investing in funds that specialise in buying bonds with a short maturity date, such as AXA Sterling Credit Short Duration Bond.
The £467m fund, which currently yields 1.5 per cent and has an ongoing charges figure of 0.43 per cent, is focused on providing income with low risk.
Over five years the fund, run by Nicolas Trindade, has been the least volatile in the IA Sterling Corporate Bond sector, which only includes funds with 80 per cent or more exposure to investment grade bonds.
It also has the lowest maximum drawdown – the most an investor could have lost if buying and selling at the worst possible moments – of just 1.37 per cent, compared to the sector average of 5.48 per cent.
Performance vs sector over 5yrs
Source: FE Analytics
As the graph shows, while the returns have not been as high as its peers, the fund has remained remarkably consistent.
This is due to the short-duration nature of the bonds, which mean they are extremely unlikely to default, but have a lower yield than debt with a longer date to maturity.
Square Mile Research added: “Generally speaking the fund is likely to behave in a defensive manner, performing well relative to the wider corporate bond market during periods of volatility and negative returns, but lagging, perhaps substantially, during periods of strong returns.”
Chelsea Financial’s McDermott also suggests that those funds with a high enough yield to provide a cushion, such as the Invesco Perpetual Monthly Income Plus, could be another play for investors.
While it is one of the most volatile in its sector, the £3.5bn fund currently yields 5.53 per cent and has paid out more in income than its average peer (as well as outperforming from a total return point of view) over the longer term.
Dividend-paying equity funds
Going further up the risk scale, investors could look at funds designed to perform well in inflationary environments.
“Cash generation and pricing power both provide buffers for a company, enabling it to self-fund its operations and offset rising costs by passing them on to customers,” he said.
He suggests the five crown-rated Royal London UK Equity Income fund, run by Martin Cholwill, though he warns investors are taking on a lot more risk.
The fund invests solely in high-yielding UK stocks with reliable earnings, next to no leverage and high barriers to entry. It currently yields 4.12 per cent with an OCF of 0.67 per cent.
Performance vs sector and benchmark over 5yrs
Source: FE Analytics
The fund has returned significantly more than its sector and benchmark over the last five years, and is in the top quartile for maximum drawdown – the most an investor could have lost if they had bought and sold at the worst possible times.
It also has an FE Risk Score - a measure of volatility relative to the FTSE 100 index - of 92, meaning it its past returns have been slightly less risky than the UK large cap benchmark.
Another option is to look at funds that invest in infrastructure, traditionally seen as a good investment when inflation is rising.
“Infrastructure is also a good bet, as toll roads, for example, have prices linked to inflation,” McDermott said.
“There is a new one called VT UK Infrastructure Income that I like, which invests only in the UK. It can help combat inflation and also has a yield of five per cent.”
While the £40m fund sits in the vast IA Specialist sector, it has been less volatile than the sector average and has a lower maximum drawdown. However, it has only returned 10 per cent since its launch in January, roughly a third of the sector average, as it focuses on providing a minimum five per cent income.
Focus on the UK
“Alternatively, you could just decide to put your faith in the central bank and invest in UK plc,” he said.
“R&M UK Equity Long Term Recovery and Man GLG Undervalued Assets are interesting options.”
Performance of funds vs sector and benchmark since Dec 2013
Source: FE Analytics
In 2016, the £76m R&M fund, run by Hugh Sergeant, has been the better performer, returning 13.30 per cent, while the £481m Man GLG fund has underperformed, returning just 0.5 per cent.
However, since 2013 (the year Man GLG was launched) the fund, run by FE Alpha Manager Henry Dixon and Jack Barrat, has outperformed, returning 20 per cent compared to the sector average’s gains of 16 per cent.
Both are volatile, but expect to provide long-term capital returns when the UK economy picks up – something recent Bank of England monetary policy is hoping to achieve.
Though both funds have the objective of growing capital over the longer term, thanks to their value-orientated approaches, they have yields of around 1.7 per cent.
In terms of the Man GLG Undervalued Assets fund, Square Mile Research said: “ There is definitely an ethos of exploring where others fear to tread and given the contrarian nature of the process and willingness to invest in medium and smaller sized companies, this fund at times may look and act very differently to its peers and benchmark.”
“Although this can lead to impressive periods of outperformance, there is therefore also the propensity for it to struggle when this investment style is out of favour such as in a market focused on, and led by, growth stocks.”
On the R&M offering, it said: “This fund is a little like a whisky drinker who prefers his tipple not only neat, but at full cask strength. Investors need either an iron constitution or to recognise that a little may go a long way.”
“This is a high risk, high return strategy that really needs to be considered over the long term.”