However, yields from the popular IMA UK Equity Income sector remain comparatively low, in part thanks to the strong performance of share prices. The average yield from the sector is under 4 per cent – less than the average Sterling Strategic Bond fund, which is yielding 4.3 per cent, and not much more than the average Corporate Bond portfolio.
Average yield of sectors
| Sector | Yield (%) |
|---|---|
| IMA UK Equity Income | 3.98 |
| IMA Sterling Strategic Bond | 4.3 |
| IMA Corporate Bond | 3.93 |
Source: FE Analytics
Henderson’s Jenna Barnard recently told FE Trustnet that investors need to change the way they look at bonds. Instead of using them for total return potential, she said, they need to look upon the asset class as a pure income play, offering both a strong dividend yield and the diversification benefits of splitting assets between bonds and equities.
There are worries that the 30-year bull-run is coming to an end, but as Hargreaves Lansdown’s Mark Dampier recently pointed out, yields are likely to stay low as long as interest rates remain close to current levels.
For investors who are looking for a reliable and steady stream of income and who do not want to be exposed to the higher levels of volatility associated with the equity markets, a high-yielding bond fund might be a good alternative.
Here are five that are paying more to investors than their equity income counterparts.
PFS TwentyFour Dynamic Bond
The £123.6m PFS TwentyFour Dynamic Bond fund is undoubtedly leading the charge when it comes to paying a solid dividend yield.
Having recently celebrated its third anniversary, the fund achieved the highest FE Crown rating at the first time of asking in the latest rebalancing.
It is yielding 6.86 per cent, the highest figure in the IMA Sterling Strategic Bond sector, and more than every UK Equity Income portfolio, apart from Premier Optimum Income, Insight Equity Income Booster and Legg Mason Income Optimiser.
The fund has smashed the performance of the IMA Sterling Strategic Bond sector and Libor GBP 3m index over one and three years, and has continued to outperform over the shorter term, in spite of rampant volatility from bonds.
Since launch, the fund has gained 27.16 per cent, compared with 19.66 per cent from the sector and just 2.5 per cent from the index.
Performance of fund vs sector and index since launch
Source: FE Analytics
While the fund has been more volatile than its sector, its annualised score is roughly one-third that of the FTSE All Share over the period.
PFS TwentyFour Dynamic Bond requires a minimum investment of £1,000 and has ongoing charges of just 0.91 per cent.
Royal London Sterling Extra Yield Bond
Nipping at the heels of the TwentyFour portfolio is the £810.4m Royal London Sterling Extra Yield Bond fund, run by Eric Holt.
The five crown-rated fund is yielding 6.82 per cent and has consistently outperformed the IMA Sterling Strategic Bond sector over one, three and five years.
Over the last five years the fund has made 42.99 per cent compared with 36.9 per cent from the sector.
Holt invests in a mix of debt from companies in the UK, North America and Europe, with a minimal allocation to Australasia.
Among the fund's top holdings are UK-based hotel company Thistle Hotels, international banking and asset management group Investec Bank and UK-based life and pension fund consolidator Phoenix Life.
Royal London Sterling Extra Yield Bond requires a minimum investment of £1,000 and has ongoing charges of 1.38 per cent.
Premier Strategic High Income Bond
The Premier Strategic High Income Bond fund has a yield of 6.41 per cent, more than that paid by the majority of fixed income and equity portfolios.
The highest weightings in Paul Smith’s fund are evenly split between BBB-rated investment grade bonds and riskier BB-rated bonds – at roughly 28 per cent each.
The fund also has 12.62 per cent in equities.
Smith agrees with Barnard that bonds will struggle to deliver the same level of returns over the next few years as they have done in the recent past, but expects to see strong dividend payouts from the asset class in the future.
"Bonds are at their lowest yields in history and overall can’t repeat the returns seen in recent years," he said in a recent note to investors.
"We’d expect correlations to break down in 2013 and so the highest-yielding bonds won’t necessarily deliver the highest returns."
The fund has lagged the IMA Sterling Strategic Bond sector over three, five and 10 years, but has outperformed it over the past 12 months, picking up 17.39 per cent, compared with 6.83 per cent from the sector.
The manager has recently added names such as UK gas and electricity transmission company National Grid and UK luxury car manufacturer Aston Martin.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.97 per cent, making it more expensive than most of the other funds on this list.
SJP Corporate Bond
Star bond duo Paul Causer (pictured) and Paul Read head up SJP Corporate Bond, which is the highest-yielding fund in the IMA Sterling Corporate Bond sector, with a payout of 6.3 per cent.
In the five years since the Invesco pair took over the five crown-rated fund, it has consistently outperformed both the sector and Libor GBP 3 month index, returning 48.25 per cent.
The sector and index have gained 36.52 per cent and 6.53 per cent over this time, respectively.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
It is slightly riskier, however, holding the highest weighting in the portfolio to sub-investment grade bonds, though the managers have no allocation to equities.
However, the fund has been less volatile than both the IMA UK Equity Income sector and the FTSE All Share over the last five years, with an annualised score of 12.42 per cent.
It requires a minimum investment of £1,500 and has ongoing charges of 1.5 per cent.
Henderson Fixed Interest Monthly Income
Barnard, who has been managing the Henderson Fixed Interest Monthly Income fund alongside John Pattullo since June 2011, has certainly put her money where her mouth is.
The fund is currently yielding 6 per cent and invests primarily in investment grade bonds, aiming to deliver the highest possible income while mitigating credit risk.
Nearly 60 per cent of the portfolio is invested in the UK, while nearly 30 per cent is in European debt.
Among the fund’s top holdings are Dutch cable operator Ziggo, UK television and internet provider Virgin Media and UK newspaper group Daily Mail & General Trust.
Since the pair took over the £754.4m fund, it has made 11.12 per cent, compared with 12.99 per cent from the IMA Sterling Strategic Bond sector.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.45 per cent.
