Investing in higher yielding corporate bond funds has proved to be a successful strategy for clients primarily wanting income from their investments. This sort of fund fell sharply in the wake of the credit crunch and particularly following the demise of Lehman Brothers and three Icelandic banks late in 2008. But they have recovered over the past 18 months to an extent that previous double digit returns are now down to 6%-7%. That’s still pretty good when returns on cash are meagre unless you are prepared to lock your money away in a bank or building society for 4 years or more.
Nevertheless, there is now a new category of high yielding funds to consider. This is equity income funds, but not UK equity income funds - no we like global ones.
Until comparatively recently, the UK was one of very few countries that offered a reasonable dividend return on certain equities and mainly blue chip shares. After poor capital performances vis-a-vis other sectors in 2008-09, some of these UK equity income funds look quite interesting. Unfortunately, most of them invest in the same funds so there are lots of duplicates. Many will invest in tobacco giant BAT, drug giant Glaxo and Shell etc. These funds took a body blow in 2010 when BP (the second highest dividend payer) shelved paying dividends following the rig bow out in the Gulf of Mexico in April.
But I think there is a better bet than UK equity funds and that is global equity income funds. Four you might consider are:
| Fund | Latest Historic Yield |
| Newton Asian Income | 4.58% |
| Threadneedle Global Equity Income | 4.60% |
| Baillie Gifford Global Income | 4.20% |
| Newton Global Higher Income | 4.77% |
There is also the new boy on the block; Invesco Perpetual Asian Equity Income.
One big attraction of these funds is that they have a much more varied portfolio – obviously because they can invest worldwide – but they also have very different investment strategies as can be plainly seen from the top 10 funds shown on their factsheets. Not only that but these yields are higher than those currently available on UK equity funds.
Now, of course, yields of around 4.5% are less than those currently available on high yield corporate bond funds. Take also into account that, within an ISA, an investor cannot reclaim 10% tax on dividends but can reclaim 20% tax on interest paid on a corporate bond fund. On the other hand, equity income funds should be able to produce a growing stream of dividend income whereas I suspect that the yields on high yielding corporate bond funds have peaked. Corporate bond funds are still attractive while credit defaults stay low but I am now switching my attention to global equity income funds for clients who want an above average income and one that is likely to grow a bit to offset the effects of rampant inflation.
