Winterflood’s investment trust analyst Simon Elliott points to BlackRock Commodities Income IT as an alternative source of income, as growth in China looks set to drive the commodities sector.
"We view this as a very interesting fund in the current low interest rate environment. The 4.1 per cent yield is attractive and there is also access to potentially strong capital growth."
"There is a wealth of experience in the BlackRock Natural Resources team and the manager has access to extensive resources. In our opinion this fund is a credible alternative to direct holdings in diversified miners or major oil companies," Elliott said.
Performance of fund vs sector over 5-yrs
Source: FE Analytics
Our data shows the investment trust lagging its IT Commodities and Natural Resources sector over one, three and five years, yet it is trading on a premium of 2.86 per cent.
"The manager says the long-term fundamentals for the sector are positive and valuations are currently attractive," Elliott continued. "Commodity companies have significantly strengthened balance sheets and are better positioned for potential downturns than they were in 2008."
"As a result, dividends and share buybacks are increasing in the sector, and the manager believes that this is a trend that will continue."
Chris Spear, managing director at IFA Spear Financial, says commodities may be too risky for those in retirement looking for a stable income, as the volatility in the sector makes it less attractive. He points to Asian income as an interesting, but safer, area.
"Volatility is as important as income, so you need to look at that performance as well as the yield. Investors can get a 3 to 5 per cent yield in their portfolio by carefully selecting strong income funds. Schroder Oriental Income has a 4 per cent yield, while First State Global Listed Infrastructure is paying out around 3.5 per cent," he said.
Spear also uses JP Morgan US Equity Income as a diversifier for his investors.
Bestinvest’s senior research analyst Ben Seager-Scott says emerging markets should play a larger role in income investors’ portfolios.
"There’s a wide range of emerging market and Asian equity income products, but generally I don’t think these are on the radar of many investors as having the potential for decent income – most people expect them as pure growth investments," he explained.
"Newton Asian Income is great in this space, otherwise there’s Schroder Asian Income, which also has a covered-call overlay version, in the Maximiser range," he added.
Performance of funds vs sector over 5-yrs
Source: FE Analytics
Our data shows the funds have consistently outperformed their peers in the IMA Asia Pacific ex Japan sector over one, three and five years. The Newton fund is paying out 5.07 per cent, while the Schroder fund’s yield is 4.4 per cent.
For investors looking to go further out of their comfort zone, Seager-Scott also suggests VCTs.
"They are very high risk and pretty illiquid, but they do offer a tax-free income which can be pretty attractive. Some of the better-regarded evergreens like Matrix, Baronsmead and Northern VCTs could be interesting," he finished.