Two Rated Fund portfolios to deliver a £10,000 annual income


The search for income is not getting any easier. Interest rates in the UK are unlikely to rise until at least next year; in the US the Federal Reserve is, if anything, more likely to reverse last year's cut than to increase rates again in 2016; and meanwhile stock market turbulence at the start of the year pushed yields on government gilts down again.

The prospect of earning a decent return on your money by simply sticking it in the bank or a low-risk gilt fund has, therefore, receded even further into the future.

Income-seekers must resign themselves to a diversified portfolio with a decent slug of equity exposure - which does inevitably put capital at risk.

Darius McDermott, managing director of Chelsea Financial Services, believes that over the long term it is possible to achieve a yield of 4 per cent without too much risk to capital.


But he adds: 'The aim should be to diversify by asset class and geography, as that can reduce risk. If you have a suite of UK income funds, they may be concentrated in companies which cut their dividends - as happened with BP in the wake of the oil spill in the Gulf of Mexico - so all your funds could suffer a reduction in income.

'You need to spread your investment across bonds, property and equities - including overseas, small and mid-cap - to achieve a balanced portfolio.'

Tim Cockerill, investment director at Rowan Dartington, thinks it is useful first to assess how much income you need by working out your annual budget, then comparing that to the capital you have.

'If it works out at a yield of 3.5 to 4 per cent, that is a reasonable target; if it is 5 per cent, you are likely to struggle to generate enough income and maintain capital value.'

He believes that an income portfolio should start with equity income funds as the building blocks. 'These days there is a growing number of global income funds, so there is a greater opportunity to invest internationally than there was a few years ago.'

A key reason for saving is to provide income for retirement or other times it is needed, yet many of us will still be reluctant to raid the capital value of our savings.

Martin Bamford, managing director of IFA Informed Choice, says: 'Taking income from your portfolio will inevitably sacrifice long-term growth, as it is the reinvestment of income and compounding of returns on this which tends to contribute to capital growth.

'For funds with an income focus, growth and capital preservation will often be a secondary consideration, although many income funds will want to ensure a level of capital growth too.'


Inflation may be low at the moment, but the average since 1971 has been close to 7 per cent. While no one is predicting a return to that level anytime soon, even a relatively modest increase in the rate could quickly erode the value of savings.

Adrian Lowcock, head of investing at Axa Wealth, says: 'In retirement we have a limited amount of money, we are no longer earning and our savings are all that will see us through, but the costs of goods and services are rising and during our retirement we could easily see them double.

'Beating inflation should be the main aim of investing. Some bonds are linked to inflation and do the trick, while equities offer the potential to grow their dividends ahead of inflation, as companies can raise prices.'

Cockerill adds: 'If you buy equity income funds, that offers the best form of inflation-proofing, as historically dividend growth has kept up with inflation.'

In the past, investors have been advised to reduce the risk in their portfolios - for example by increasing the proportion of cash and bonds - in the run-up to retirement. Now, however, that may not be the best advice.

Increased longevity, the likelihood that many of us will carry on part-time work even after we have retired from our main job, and pension rule changes which mean that the funds can remain invested rather than being used to buy an annuity, all mean that a mix of higher- and medium-risk assets may be appropriate well into retirement.

'A more modern approach to income investing is remembering age is only a number,' says Bamford. 'The portfolio you maintain should be based around your specific financial goals, capacity for risk and attitude towards investment risk.'

McDermott adds: 'My worry is that, given increases in longevity, people can de-risk too early. If you retire at 60, and then live to the age of 85, your income needs to last a long time - so your capital needs to keep in growing for a bit.'

rated-fund-portfoliosMoney Observer has put together two portfolios of Rated Funds to provide an income of around £10,000 a year.

The first, which is medium-risk, requires a capital investment of £260,000; the second, a higher-risk version, needs £210,000. Both contain a mixture of UK and overseas equities, property and bonds.


L&G UK Property

L&G UK Property can invest across all types of property and will generally have at least 80 per cent in UK assets, although this can fall to 60 per cent if manager Michael Barrie deems it in the interest of the fund.

Chosen by Tim Cockerill and Adrian Lowcock, it aims to produce both income and capital growth and is in the top quartile of IA UK property funds.

Jupiter Strategic Bond

Jupiter Strategic Bond is the choice of Adrian Lowcock and Darius McDermott. The collapse of the bond market has been trailed for years but, so far, this fund continues to offer among the most solid returns.

That said, the bond market will eventually turn, and it makes sense to be in a fund that can invest across all types of bond. This fund has one of the best bond managers in Ariel Bezalel, who is consistently ahead of his benchmark.

Artemis Global Income

Artemis Global Income has a flexible mandate, is able to invest across all geographical regions and sizes of company, and can also hold fixed interest as may be required.

Its current biggest exposure is to Europe, and while General Electric and Apple are among its top 10 holdings, many of its other top 10 constituents are far less familiar companies from countries such as Israel and Portugal.

Invesco Select Global Equity Income

Managed by Invesco's chief investment officer Nick Mustoe, Invesco Select Global Equity Income has a similarly flexible mandate to Artemis Global, but a very different portfolio.

The US and the UK account for more than half the portfolio, and most of its top 10 are household names such as BT, Novartis and Microsoft.

Standard Life Dynamic Distribution

A balance to some of the riskier funds in the portfolio, Standard Life Dynamic Distribution is able to invest across a range of asset classes with the aim of providing income and capital growth.

Fixed interest currently accounts for around a third of the assets, and property 15 per cent.

Perpetual Income & Growth

Mark Barnett is one of the most consistent of managers and we are long-term fans of Perpetual Income & Growth. His contrarian approach ignores the benchmark in favour of seeking out companies with long-term potential.

PFS TwentyFour Dynamic Bond

PFS TwentyFour Dynamic Bond is a truly flexible bond fund, which is also able to use derivatives to enhance returns as required.

A favourite of Darius McDermott, the management company specialises in fixed interest and has particular experience in asset-backed securities, an area which fell out of favour following the financial crash but now provides some interesting opportunities.

Marlborough Multi-Cap Income

It is difficult to include small-cap funds in an income portfolio as their dividends tend to be on the low side.

Marlborough Multi-Cap Income (chosen by Adrian Lowcock), however, has a small- and mid-cap bias, although it can also choose big blue chips when it proves to be appropriate.

Manager Siddarth Chand Lall has an excellent track record and the fund is in the top quartile of the UK equity income sector.


European Assets

European Assets invests in European medium and small-cap companies and has a policy of paying a yield of 6 per cent of net asset value, using capital if required.

Its performance has been good since manager Sam Cosh took over in 2011, with a return of almost twice the benchmark.

Marlborough Multi-Cap Income

As above.

Artemis Global

As above.

Threadneedle UK Equity Income

A traditional UK equity income fund, Threadneedle UK Equity Income can invest across all classes of assets, although its largest holdings tend to be drawn from the giants of the FTSE 100. Manager Richard Colwell has a good long-term track record.

City of London Investment Trust

If City of London Investment Trust manages to increase its dividend in the year to June, it will mark an astonishing half century of consistent dividend growth, justifying its place in an income portfolio.

Manager Job Curtis has been overseeing the trust for half of that time and has a decent long-term record.

Standard Life Investments Property Income Trust

Property has a place in any income fund and closed-ended vehicles like this have a distinct advantage in flexibility.

Standard Life Investments Property Income Trust recently raised an additional £86 million to add a diverse portfolio of UK property, which should benefit from manager Jason Baggaley's skill at actively managing the portfolio to add value.

Royal Life Sterling Extra Yield Bond

Picked by Tim Cockerill, Royal London Sterling Extra Yield Bond aims for a gross redemption yield 1.25 times that of the 15-year government gilt index and so is relatively exposed to high-yield bonds, balanced with investment-grade exposure

Experienced manager Eric Holt has been running the fund for almost 13 years.

Schroder Oriental Income Asia

Schroder Oriental Income Asia has not always been associated with dividends, but a growing number of companies are now committed to providing income to their investors.

Although the region may be a turbulent place while global markets adjust to the Fed's normalisation of monetary policy, over the long term it is expected to be the engine of global growth.


Our portfolio of open-ended funds to generate an income, compiled last February, has not quite managed what it was set up for. The £250,000 invested across nine funds was intended to generate an income of £10,000 a year; in fact, it produced just over £8,500, some 15 per cent less than was needed.

It also lost just under 3 per cent of its value, leaving the fund worth £242,581. Combined, however, the income and capital value was worth £251,085, so investors would have come out marginally ahead over the year.

While a capital loss is always painful, the decline in the portfolio was well below the 10.2 per cent fall suffered in the FTSE 100, underlining the benefits of a diversified portfolio.

Indeed, the best performance came from the property element, with the L&G UK Property fund rising by more than 9 per cent, as well as producing £600 of income.

In second place - and the only other fund to have risen in value - was Marlborough Multi-Cap Income, a true stock-picking fund with holdings spread across the market rather than concentrated in the familiar names of the FTSE 100. It also gave the highest dividend payment in the portfolio.

Our international holdings were disappointing. Newton Asian Income suffered from the slump in emerging markets; M&G’s Global Dividend fund has also been a disappointment, and together these two lost almost £10,000, far more than their combined £2,115 in dividends.

The two bond funds - Royal London Sterling Extra Yield and Henderson Strategic Bond - came out roughly even overall, taking the loss and the income together, while Threadneedle Pan European Dividend also produced enough income to compensate for its loss over the year.

That outcome underlines the fact that dividends are crucial to investment returns, and that taking income from your investments will risk a fall in capital.

Subscribe to Money Observer magazine



Post new comment

The content of this field is kept private and will not be shown publicly.
By submitting this form, you accept the Mollom privacy policy.