Take Your Profit While You Can; This Is Money: Isa Guide: In These Troubled Times, Many Income Funds Have Outperformed Growth Packages. It's All about Picking the Right Deal for Your Needs, Says Jo Thornhill

By Thornhill, Jo | The Evening Standard (London, England), March 13, 2002 | Go to article overview

Take Your Profit While You Can; This Is Money: Isa Guide: In These Troubled Times, Many Income Funds Have Outperformed Growth Packages. It's All about Picking the Right Deal for Your Needs, Says Jo Thornhill


Thornhill, Jo, The Evening Standard (London, England)


Byline: JO THORNHILL

INCOME funds have had it good in recent years. They've outperformed average growth funds by some margin while the stock markets have languished in the doldrums. But the question income seekers are asking is: how long can it last before the cycle turns?

Experts say the future is bright: "Growth funds aren't enjoying the sort of returns they saw five years ago during the tech boom, and I think there is still room for income funds to outperform this year," says Meera Patel, fund analyst at independent adviser Hargreaves Lansdown.

"The market will continue to struggle this year, so investors need to be realistic about the sort of income they can get. Bond funds are one of the best sectors to be in at the moment," she adds.

Equity income funds have also fared well. According to statistics from the Investment Managers' Association (IMA), a [pound]1,000 investment in a UK equity income fund over the past 10 years would now be worth, on average, [pound]3,004.

Compare that with [pound]1,000 invested in the average UK All-Companies fund, which would be worth [pound]2,638.

James Dalby, head of research at Leeds-based adviser Bates Investments, says: "It's not as though the market has had a good run, but managers with good stock-picking ability have held up well against the FT-SE."

The fund you choose should depend on your income needs and attitude to risk.

If your capital falls in value, your potential to earn income also drops.

For non-risk takers, gilt funds are the safest bet, but they aren't popular.

Patel says: "Low risk means accepting very low returns. They're not very attractive rates at the moment so they only suit the most cautious investors."

On the plus side, the charges on gilt funds are low, typically less than one per cent annually. In contrast, expect to pay around a three per cent set-up charge and a one per cent annual fee on bond funds, and around a four-to-five per cent initial charge and a one-to-1.5 per cent annual fee for equity-based funds. Unless you get a good discount.

To gain higher returns than you'd get from the best cash deposit accounts, investment-grade corporate bond funds are a good option. They yield an average annual income of between 5.5 per cent and seven per cent.

Dalby says the corporate bond funds of Britannic and M&G are strong and have solid fixed-interest teams. He adds: "Some funds invest a small amount in higher-yield corporate bonds, so there is a chance of greater upside, but generally the risk is low."

High-yield bond funds typically offer returns of above eight per cent. The downside is greater risk to capital because assets are invested in what are effectively high-risk corporate IOUs.

Patel recommends Royal SunAlliance Maximum Income and Threadneedle High Yield in this sector.

While bond funds can suit those needing an immediate and more regular income, the opportunity for capital growth is limited. …

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