Mixed-asset funds work well for income seekers

One group of funds that has undergone a rapid increase in popularity in recent years is multi-asset products. These funds hold different types of investments, such as shares and bonds, in one portfolio.

Many new funds of this type have been launched. Most are designed for investors seeking capital growth.

However, a small but growing number of mixed-asset income products are now available.

These funds are likely to be of particular interest to retired investors looking for an alternative to annuities that provides reliable income.

The basic aim of mixed-asset products is to provide investors with relatively consistent and balanced returns by combining the right types of asset at the right time. For income investors, a mixed fund can produce both stable and growing income.

Best performers

Most mixed-asset funds with a focus on income can be found in the Investment Management Association's mixed investments 20-60% shares sector.

Indeed, many of them are currently among the best performers over three years in this sector. Some are directly invested, while others are funds of funds, investing in either in-house funds or funds run by other managers.

One of the top performers over the past three years has been Standard Life Investments Dynamic Distribution, which invests in a spread of the group's own funds in different asset classes, including SLI UK Equity High Income, SLI Corporate Bond and SLI UK Property. It currently yields 3.5%, and it distributes income four times a year.

Premier Multi-Asset Distribution has a yield of 4.4% and distributes income quarterly, while Premier Multi-Asset Monthly Income has a 4.9% yield and pays a monthly income. Both are multi-manager funds run by David Hambidge and his team.

Hambidge says: "The main difference between the funds is that Premier Multi-Asset Distribution has the explicit aim of growing its income and a slightly higher exposure to equities. Premier Multi-Asset Monthly Income currently has more in fixed-interest and property funds."

When deciding on the asset allocation of these funds, Hambidge says, "the main priority is finding the best-value sources of strong natural income".

He won't invest in asset classes that are trading at a premium in order to gain income. This makes him something of a contrarian, because when prices go up and yields fall, he will look elsewhere.

Other top-performing funds in the sector include Invesco Perpetual Distribution and JPMorgan Multi-Asset Income. These are not funds of funds, but instead use in-house specialists.

Invesco Perpetual Distribution is a traditional mixed-asset fund combining bonds and shares, with an emphasis on bonds. The bond element is managed by Paul Causer and Paul Read; Ciaran Mallon manages the equity portion. It currently yields 4%. It pays income monthly.

JPMorgan Multi-Asset Income invests in a more diverse range of assets. The starting point is 35% in global equities, 35% in global high-yield bonds and 10% each in emerging market bonds, investment-grade bonds and real estate investment trusts.

However, the fund is flexible. Michael Schoenhaut, the lead manager, decides on the allocations and uses specialist JPMorgan investment managers to run the different parts of the fund. Like the Invesco Perpetual fund, it pays income monthly. It has a 3.7% yield.

Diversification role

F&C Multi-Manager Navigator Income is another income-focused multi-asset fund that pays income quarterly.

Rob Burdett, co-manager of the fund with Gary Potter, believes the multi-manager approach is even more appropriate for multi-asset income investing than for growth because of the diversification it provides.

In that respect, Burdett says: "The fund currently holds 31 positions in equity, bond and property funds, which means it has exposure to more than 2,000 underlying 'engines' of income. That helps it provide reliable payouts to investors." Over the past five years, it has maintained a consistent yield of 5%.

When deciding where to invest, Burdett says the primary aim is finding assets that will provide sustainable income. Capital is a secondary consideration, although he has to be convinced an investment will at least remain intact on a five-year view.

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.