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Funds for income hunters

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Kate Marshall, Lead Investment Analyst at Hargreaves Lansdown
  • Spanning global, UK, Asia, corporate bonds and ESG investing.
  • Equity income funds allow investors to diversify across many dividend-paying companies.
  • Bonds may offer a more stable income than shares – a useful diversifier to equity income funds.

Kate Marshall, Lead Investment Analyst at Hargreaves Lansdown:

“Many companies were forced to cut or suspend their dividend payments to shareholders in 2020, after the pandemic caused havoc, led to lockdowns, and put pressure on businesses across the globe. This disadvantaged many investors in need of a regular income from their investments.

Fortunately, global dividends have since improved, with many companies recovering and reinstating payments in 2021. Dividends have long been a key element of the UK market and we expect this to continue, while the number of dividend-paying companies globally has increased over the years. Investors looking to improve their income credentials can take a look at our income picks, which are spread across a variety of assets and geographies.”

Global income:

Artemis Global Income

“Jacob de Tusch-Lec, along with his co-manager James Davidson, scour the globe for companies they think can earn plenty of cash that can be used to pay dividends. They look beyond the usual names that make up many global income funds, and often invest in out-of-favour companies at attractive share prices. This includes large, medium-sized and higher-risk smaller companies. Company selection is combined with a view on where the global economy is headed, and the fund is invested according to this outlook. De Tusch-Lec is an experienced global income fund manager and has stayed true to his investment philosophy over many years. He also has the support of other global and income analysts at Artemis. This fund could diversify an income portfolio and work well with funds using a different investment style, such as growth-focused funds. The fund also has the ability to invest in emerging markets and, although they don’t currently feature in the fund, the managers can invest in high-yield bonds and derivatives, all of which add risk.”

Responsible investing:

Trojan Ethical Income

“UK equity income funds have traditionally achieved much of their income from areas such as mining and tobacco. Some investors prefer to avoid these areas, so this is where a fund like Trojan Ethical Income could come in. Hugo Ure, the fund’s manager, doesn’t invest in companies deemed unethical, such as those with significant involvement in armaments, tobacco, pornography, fossil fuels, alcohol, gambling, and high interest lending. He also conducts Environmental, Social and Governance (ESG) analysis on each company to achieve a deeper understanding of the risks. Where he feels improvements can be made, he’ll engage with the company. While a large part of this fund invests in the UK, the manager invests in some overseas companies too. The focus is on large and medium-sized companies, although the manager does have the flexibility to invest in higher-risk smaller companies. This fund could bring diversification to an income focused portfolio or be a good addition to a responsible investment portfolio built to provide income. The manager also has the flexibility to invest in derivatives which, if used, adds risk.”

Edentree Responsible and Sustainable Managed Income

“This fund aims to pay a higher income than many others. It does this by investing in different assets, including global company shares, bonds, and cash. This can include higher-risk emerging markets companies and high-yield bonds. Shares make up most of the fund and have the potential to generate an income and long-term growth. Some investments in bonds and cash provide diversification and could reduce part of the volatility that normally comes with only investing in shares. This means the fund could provide important diversification and some balance alongside equity funds in a more adventurous income-focused portfolio. The fund’s managers also use a responsible and sustainable investment screen when choosing companies to invest in. This includes ‘negative screening’ – excluding companies that the fund managers believe cause harm – as well as ‘positive screening’ to identify companies with strong responsible and sustainable corporate practices.”

UK Equity Income:

Aviva UK Listed Equity Income

“Chris Murphy and James Balfour, this fund’s managers, look for established UK companies that are market leaders with a sustainable competitive advantage and have predictable cash flows to support dividends. The fund blends companies able to offer a high yield now with others capable of strong dividend growth, although yield isn’t guaranteed. The emphasis on dividends and dividend growth makes this a more conventional UK equity income fund, though it invests more in medium-sized companies than some others in the sector. While UK equity income funds have the flexibility to invest in some overseas companies, this one focuses purely on the UK. It could help form the foundation of an income portfolio, to be held alongside bond funds, or a global equity income fund. The managers normally invest in between 40 and 75 companies, so each can have a significant impact on performance, both positively and negatively, which increases risk. Lots of these are large companies, many with global operations. That means their success largely depends on the state of the global economy, not just how well the UK does. He also invests in medium sized and smaller companies, which have the potential for higher growth but are riskier.”

Asia income fund:

Jupiter Asian Income

“This fund combines exposure to the long term growth potential of Asian markets with a regular income. Its focus on overseas markets means we believe it could offer important diversification to an income portfolio, though it’s a more adventurous option. Jason Pidcock, the fund’s manager, focuses on larger businesses in developed Asia Pacific markets, such as Hong Kong, Singapore, Australia, and Taiwan, though the fund also invests in some higher-risk emerging markets including India. The manager also invests in a relatively small number of around 30 companies, which allows each one to have a meaningful impact on performance but can also add risk. Pidcock looks for companies that pay a regular and sustainable dividend, which he believes will remain stable even during tougher market conditions. He likes companies that have the potential to grow dividends over time, though he also invests in some companies that pay a lower income but have greater growth potential.”

Corporate Bond income fund:

Royal London Corporate Bond

“This fund invests in bonds, which effectively means it lends money to borrowers in exchange for regular income payments – or ‘interest’. It focuses on debt issued by companies, and this includes some higher-risk high yield bonds. These have a higher chance of defaulting on their interest repayments but pay a higher level of income for the extra risk taken. Bonds also offer diversification from company shares and may help limit some of the volatility that normally comes with investing purely in the stock market. Bond markets have generally risen strongly over recent years, which means yields are lower and the scope for significant further gains may be limited. That said, bonds can play a part in a diversified portfolio and offer income diversification. This fund is run by an experienced bond fund management team with a long track record. It’s a more adventurous option in the Corporate Bond sector. It could work well as part of a long-term portfolio invested for income. The fund’s edge comes from carrying out detailed research into ‘low profile’ parts of the market. These under researched bonds may be unrated, complex and often secured against a company’s assets. This provides the opportunity to add value on a case-by-case basis, although these bonds are higher risk.”

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