IMA fund flow data shows investors are increasingly looking to the Global Equity Income sector to diversify their holdings and reduce concentration risk.
Ruffer’s Steve Russell, who believes inflation could go as high as 9 per cent in the UK, has even warned of a bubble forming in equity income stocks, making it even more important to find alternatives.
FE Trustnet looks at the options available to investors who want to diversify their income stream.
IMA Global Equity Income
Richard Troue (pictured), investment analyst at Hargreaves Lansdown, said: "Global income funds tend to get exposure to other developed markets such as Europe and the US as well as high growth Asian and emerging market economies which offer capital growth as well as dividend growth."
Troue likes the £2.95bn Newton Global Higher Income fund, which has five FE crowns and is managed by FE Alpha Manager James Harries and Nick Clay.
The historic yield on the fund is 4.29 per cent, and since launch it has made 76.56 per cent, according to data from FE Analytics.
Performance of fund vs index since launch
Source: FE Analytics
The sector is young and there were only seven constituents when the Newton fund was launched. Even though this number has now grown to 25, comparisons with the sector average are still of limited use.
Troue commented: "Newton’s approach of looking for businesses that will benefit from themes such as the rise of the emerging market economies or the spread of wireless technology seems to work very well for them both in this fund and in their Asian Income fund."
"They are also launching an emerging market income fund in the near future," he added.
Jason Hollands, managing director at Bestinvest, likes Aberdeen World Growth & Income.
Although it has not produced spectacular returns since its launch in 2009 - 28.41 per cent puts it close to the sector average - it has a historic yield of 4.1 per cent.
Currency risk is something investors need to think of when they allocate their money outside of the UK, and Troue highlights the JPM Global Equity Income Hedged fund for those who don’t want to take that risk.
"But I tend to think that if you don’t want to take currency risk you should probably not invest outside the UK," he added.
Asian income
There are seven Asian income funds for investors who want more exposure to this region's fast-growing markets.
However, this week FE Trustnet research highlighted how a large proportion of the yield paid out by these funds is derived from Australian stocks, calling into question whether an emerging market play is really what they offer to investors.
Troue prefers the global funds due to their developed market bias and resulting lower volatility, but says investors can choose from highly regarded portfolios from Newton, Invesco Perpetual and Henderson among others.
In the closed-ended space there is also Aberdeen Asian Income, which is second in the IT Asia Pacific ex Japan sector over five years and also the top-performing income fund.
The trust has been trading at a premium of 7.5 per cent due to strong investor demand, but a planned issue of C shares next month would allow investors to get in at a much lower price.
Troue commented: "What you are finding is income funds are in demand and we have seen a lot of trusts in that sector go to a premium so that’s something to bear in mind and this could be a good entry point."
Property
The property market collapsed after the financial crash of 2008 and investor interest diminished.
The laws of supply and demand mean that the asset class will eventually recover however, and in the meantime some investors are finding the yields extremely attractive.
Vicky Watson, manager of the Scottish Widows European Real Estate Securities fund, points out that the European property sector is currently yielding 5.1 per cent and the UK sector 4.7 per cent.
This is substantially higher than the 4.2 per cent distributed by the average fund in the UK Equity Income sector.
Hollands likes Henderson UK Property, currently yielding 4.8 per cent, and says that the asset class typically makes up 15 per cent of an income portfolio.
Alternatively he suggests Schroder Global Property Income Maximiser, which invests in the shares of property investment trusts and other related securities; data from FE Analytics shows it is currently yielding 7.02 per cent.
Troue is much more wary of the asset class, saying that while it is attractive from an income point of view, the potential for capital growth is in doubt.
"We are still more nervous about property. I think it’s a way to diversify away from equities, but there can be a price. We suggest no more than 2 to 5 per cent of a portfolio should be made up of commercial property."
Fixed interest
Managers have been warning of crowding in the corporate bond market, as investors sick of record-low yields on gilts seek AAA-rated alternatives.
Troue commented: "There are still attractive yields on some corporate bonds and we have seen some strong demand for the funds. But you have to factor in that they are quite connected to the price of gilts, so if you see gilts rising that could well pull the corporate market down."
"We prefer strategic bond funds that have the flexibility to invest in high yield bonds and corporates. The yield will vary a lot of time on these funds but we prefer the ability of managers to be more flexible and achieve capital growth too."
Troue recommends Jupiter Strategic Bond, managed by FE Alpha Manager Ariel Bezalel, who in July was named by FE Trustnet as the newcomer with the best risk-adjusted record in the industry.
"He has made some quite astute calls in the past and has a growing reputation," Troue continued. "Although he doesn’t have the longer track record of some bond fund managers, he didn’t come from nowhere when he took over the fund, he had experience in the industry."
Hollands likes Fidelity Moneybuilder Income in the IMA Sterling Corporate Bond sector, which FE Analytics data shows is a top-quartile fund over five and 10 years. It is currently yielding 3.8 per cent.
In the high yield sector he favours AXA Global High Income, currently yielding 5 per cent.
IMA Equity and Bond Income
This frequently overlooked sector has a performance record to rival IMA UK Equity Income.
FE Trustnet research showed in June that it had a better five-year record than its larger counterpart and a significant tendency to outperform in falling markets due to the stabilising effect of its bond exposure.
Troue is unconvinced, however: "We do like some funds that are a mixture of equity and bonds, but not currently any that are in this sector."
"These funds are probably for investors who have a smaller pot or those that are looking for simplicity and are happy to have a manager make the asset-allocation calls."
Infrastructure
Hollands thinks income-seeking investors should consider diversifying into infrastructure funds – particularly those that invest in long-term Government-backed projects, which are often tied in to long-term contracts that are unlikely to be broken.
There are five funds in the IT Infrastructure sector that pay out a dividend. The lowest figure of 4.7 per cent is for the 3i Infrastructure fund – which is higher than that of the majority of UK Equity Income funds – while the highest figure of 6.26 per cent is recorded by the GCP Infrastructure Investments portfolio.
John Laing Infrastructure yields 5.58 per cent and was recommended by Hollands in a recent FE Trustnet interview.