Top tips for immediate income in 2014
29th January 2014 14:25
by Helen Pridham from interactive investor
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Low rates of interest on deposit accounts have made funds much more attractive to income investors. Many income-oriented funds offer higher yields, net of basic-rate tax, than the best rates on savings accounts.
However, starting yields on funds can differ according to the type of investments they hold, and these investments will influence future returns on the funds.
We therefore asked our expert panel to focus their tips on three categories of income funds: those likely to give a secure immediate income, typically funds holding bonds; those providing a balanced income, typically derived from a mixture of bonds and shares; and those that should provide a growing income, typically from holding equities. Bond funds tend to be less volatile than sharebased funds but with less growth potential.
Investment trusts and investment companies have several advantages for investors pursuing an income-oriented strategy.
They can put aside some of their revenue in good years to bolster dividends in more difficult times, thereby achieving a more reliable dividend stream than open-ended funds. Indeed, some trusts have raised their dividend every year for more than 40 years. They can also use gearing to bolster their income.
Additionally, they are able to invest in a growing range of relatively illiquid asset classes, some of which can be used to generate a high and reliable yield, such as property and infrastructure. The main caveat is that investors should watch out for trusts achieving high yields by turning capital into income.
For more in the series, read: Top seven tips for solid growth investing, Seven top tips to invest for higher-risk growth and Top tips to invest speculatively for growth.
FUND TIPSTERS
Brian Dennehy - FundExpert
Brian Dennehy is an experienced independent financial adviser and has run his own firm, Dennehy Weller, for many years. The company provides advice and research for private investors.In 2012 he launched FundExpert, a fund platform for self-directed investors that provides research and other tools to help them choose funds that suit their needs.
Mick Gilligan - Killik & Co
Mick Gilligan is a partner at the private client stockbroker Killik & Co, where he is currently head of research. His main focus is on searching out the best funds and investment trusts to recommend to clients. He also manages one of Money Observer’s hypothetical investment portfolios.
Gavin Haynes - Whitechurch Securities
Gavin Haynes is managing director of Whitechurch Securities, which provides discretionary portfolio management services to private clients. Before joining Whitechurch, Gavin worked in stockbroking. He has been managing portfolios of funds since 1997.
John Husselbee - North Investment Partners
John Husselbee specialises in multiasset, multi-manager investing. Before setting up North Investment Partners in 2005, John was director of multi-manager investment at Henderson Global Investors, where he was responsible for portfolio construction and fund selection.North Investment Partners was recently acquired by Liontrust.
Rob Burdett - Thames River
Rob Burdett has been running multimanager funds since 1991. After starting his career in stockbroking, he began managing funds of funds at Rothschild and then Credit Suisse. In 2007 he joined Thames River to set up its multi-manager business, which was subsequently taken over by F&C.
Tony Yarrow - Wise Investment
Tony Yarrow has been a financial adviser for most of his career. He set up his own firm, Wise Investment, in 1992, to provide financial and investment advice to individuals. He now manages investment portfolios for clients and runs two investment funds. He also manages one of Money Observer’s hypothetical investment portfolios.
PFS TwentyFour Dynamic Bond
TwentyFour Asset Management is a rare true bond boutique, reckons Rob Burdett. "We think this gives an edge in terms of flexibility and incentivisation," he says.
"This is especially important in an era of changing interest rate expectations, when experimental monetary policy is being applied. Thoroughness is vital and, here, TwentyFour scores well."
The is usefully diversified, investing in eight asset classes, from asset-backed securities to government bonds and cash.
"The resulting portfolio is a very focused one for fixed interest, which has helped its performance in recent years," he says.
PFS TwentyFour Monument Bond
Longer-term interest rates appear to be on an upward path. "This is a difficult backdrop for traditional fixed-income funds to make money in," says Mick Gilligan.
"As a result, we see a case for having exposure to good-quality floating-rate income."
He thinks the offers protection against rising interest rates and has a relatively low correlation to broader fixed-income markets from a diversified portfolio of high-quality, investment-grade UK and European residential mortgage-backed securities.
Gilligan adds: "The default experience in these types of investments in Europe is very low and the team that manage this fund have strong experience in this area."
Kames Strategic Bond
"The yield on this fund is not particularly high," admits John Husselbee, "but I believe investors in this asset class should be looking for total return, and if they need a higher income they could dip into the potential capital gains."
The advantage of funds such as is that they can invest in every corner of the bond market. Sophisticated tools help managers manage risk.
Husselbee says: "Experience and resources are essential attributes in selecting the appropriate fund. David Roberts and Phil Milburn have these attributes and they seek to maximise total return from a broad range of fixed-interest asset classes."
Standard Life Investments Emerging Market Debt
The small fund is managed by Richard House, who was previously at Threadneedle. "He is very experienced," says Tony Yarrow. "Emerging market debt isn't flavour of the month, but this manager seeks to exploit pockets of value to good effect."
This fund almost exclusively holds dollar-denominated debt. Most debt is denominated in local currencies. However, with the emerging economies slowing and their currencies expected to weaken, Yarrow reckons the dollar asset class is a safer bet for 2014.
JOHCM UK Equity Income
Brian Dennehy doubts that bond funds are currently the most effective solution for UK investors wanting a reliable, long-term income. He therefore recommends the from JO Hambro.
He says: "Managers James Lowen and Clive Beagles have grown the fund's income payout in six of the past seven years, something not all their fellow income managers have achieved. They look for companies of different sizes with above-average dividend yields, which they believe are likely to be able to increase their dividends irrespective of economic conditions. They are optimistic about the future."
International Public Partnerships
Tim Cockerill picks for those wanting security and consistency of income. It's one of the best-established infrastructure trusts and yields nearly 5%, paid twice a year.
Its underlying source of income is secure, predictable and partially inflation-linked. Its portfolio is diversified by both sector and geography - nearly 40% overseas - and shares sell at a comparatively low premium for the sector.
Doric Nimrod Air Three
Andrew McHattie says one of the advantages of closed-end funds is that they can buy illiquid assets and hold them for the long term. As bank funding has dried up, trusts have capitalised by providing cash for infrastructure projects, property and even aircraft, thereby securing a steady income.
For those wanting immediate income, he picks Doric Nimrod Air Three (DNA3), the newest of three trusts established to buy and lease Airbus A380s to Emirates Airlines. Once the lease agreements on its four aircraft are in place, the trust expects to pay quarterly dividends totalling 8.25p a year per share.
"This won't grow, but unlike most infrastructure trusts that own wasting assets, this trust owns the aircraft and can sell them at the end of the 12-year lease agreements, holding out the promise of some capital return as well," he says.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.