However, with valuations high in UK equity market managers have increasingly stated that value in dividend paying stocks is proving more allusive than at any time since the early days of the financial crisis.
Bond managers have also found the hunt for yield more difficult over the past year, with managers increasingly investing up the risk scale.
Here we take a look at three less well-known funds which fund research firm and FE strategic partner Square Mile recommends for those looking for income.
Matthews Asia Asia Dividend
This £467m fund was launched in February 2011 and has five FE Crowns, the highest score possible.
Matthews Asia is relatively unknown among UK retail investors but nonetheless has some the top performing Asia funds in the IMA universe.
Yu Zhang has co-managed the fund since March 2011 and he was joined by Robert Horrocks in July 2013 and Vivek Tanneeru in April 2014.
The fund is the best performer in its IMA Asia inc Japan sector since launch and second best over three years, according to data from FE Analytics.
Since launch it has returned 27.6 per cent compared with 12.64 per cent from the sector and 14.26 per cent from the MSCI Asia Pacific index.
Performance of fund, sector and index since 2011
Source: FE Analytics
Asia Pacific makes up the bulk of the portfolio – approximately two-thirds of exposure – with Japan the next largest regional play.
It has 24 per cent in Japanese equities including its largest holding Japan Tobacco, which makes up 4 per cent of the portfolio.
It also has a small exposure of 5.3 per cent in Australasia and 1.6 per cent in European equities.
According to Square Mile, investors should not be deterred by the reasonably short track record and modest fund size.
“The strategy that this fund follows was launched in 2006 and boasts a sizeable body of assets. Overall, we think highly of the manager, the strong team-oriented investment culture and the consistency that they have applied in the running of this fund. We consider this to be a strong Asian income offering,” Square Mile said.
The fund has an ongoing charges figure [OCF] of 2 per cent.
PFS TwentyFour Monument Bond
Square Mile recommends this fund, which also has five FE Crowns, due to its preference for residential mortgage backed securities [RMBS], which should weather the headwinds of a rising rate environment better than a normal bond fund.
“This is a unique fund, run by an experienced team of specialist investors and offering investors access to an asset class which could otherwise be difficult to gain exposure to,” Square Mile said.
Managed by Rob Ford and Ben Hayward, it was launched in August 2009 and has returned 25.14 per cent over that time, easily beating its benchmark of three-month LIBOR.
Performance of fund and index since Aug 2009
Source: FE Analytics
Square Mile says while the managers have proven themselves capable of performing in difficult markets, their asset class of choice can carry significant risk.
“Investors should be aware that, as an asset class, RMBS carry credit risk. Although the teams' relatively cautious approach may help reduce downside risk in difficult periods, the relative illiquidity of RMBS as an asset class could lead to higher short-term capital volatility than their investment grade credit rating might imply.”
Square Mile says the fund is likely to perform well when the economy is growing, investor confidence is strengthening, liquidity is improving and interest rates are rising.
“We would expect it to underperform in times when liquidity is being removed from the market and investor sentiment deteriorating. We believe this could be a very interesting proposition for investors who wish to access an income stream which should grow as interest rates rise, potentially offering investors some protection from the effects of inflation, although this is unlikely to be linear.”
The fund has an OCF of 1.38 per cent.
Saracen Global Income & Growth
This £37m fund was launched in July 2011 and despite its small size has been one of the top performers in the IMA Global Equity Income sector since launch.
Over three years it is second best in the sector and third best since launch, since when it has returned 44.8 per cent compared with a sector average of 35.43 per cent.
Performance of fund and sector since June 2011
Source: FE Analytics
Square Mile says as the team's emphasis is upon revenue, profits and dividend growth rather than solely high yielding companies, the fund may have a lower headline yield than others in the sector but it still has the ability to generate strong income growth over time.
“There is a clear and understandable modus operandi in place, with the team aiming to invest in global leaders that have the propensity to continue to grow over the next five years. However, they balance this with a focus on the risks to the investment case and they will not invest if the worst-case scenario appears too bleak.”
Graham Campbell and David Keir co-manage the fund, with Campbell managing the fund since launch.
“Although the fund itself has a relatively short life the team behind it have many years of experience to draw upon. They appear extremely committed to the strategy and show a passion for the investment process, illustrating the level of thought and diligence that has gone into creating it.”
Saracen Global Income & Growth has a total expense ratio of 1.41 per cent.
