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Revealed: the ultimate income funds
Income-seeking investors want to find funds that deliver a healthy payout but not at the expense of growing their capital. We’ve found four income funds that have done that – in one case delivering almost £9,000 of income over 10 years on a £10,000 investment.
When assessing income funds there are, in our view, three historic performance figures investors need to look at: capital return, income paid, and total return. Capital return is the growth of your original investment, assuming that you’d taken any income paid out.
Income paid is any payouts you’ve received over that time, while total return is what your initial capital would have grown to had you automatically re-invested those income payments back into the fund.
With the latter figure you benefit from compounding. This creates a virtuous circle as those income units increase your stake in the fund, delivering higher income, which is then reinvested.
THE TOP OVERALL FUNDS
Looking at all the income funds focused on UK stocks over the past 10 years, we’ve found four that have delivered exceptional results on all three measures: Unicorn UK Income (B00Z1R8), MI Chelverton UK Equity Income (B1FD646), Montanaro UK Income (BYSRYZ3) and Royal London UK Equity Income (B8Y4ZB9).
The top fund, Unicorn UK Income, has delivered almost 90% of your original investment back in income alone over 10 years. On top of that, if you’d taken that income your original £10,000 investment would have still grown to £28,000.
The fund, which has almost £560m in assets and is run by Fraser Mackersie and Simon Moon, invests in 43 different companies, mainly small and medium sized businesses.
MI Chelverton UK Equity Income, run by fund managers David Horner and David Taylor, is another fund that has delivered stellar income as well as capital growth. The £691m fund invests mainly in medium-sized companies and targets a yield of 4%.
It has handed investors almost £8,400 of income over the past 10 years and turned the original £10,000 investment into £23,200. For those that bought the ‘accumulation’ units of the fund and reinvested the income, their original investment would have turned into £41,000.
Montanaro UK Income, meanwhile, is smaller with just £330m in assets under management, having been set up almost 12 years ago. Run by the asset manager’s founder Charles Montanaro, the fund has turned a £10,000 investment 10 years ago into £26,400 and delivered £6,351 of income.
The Royal London UK Equity Income fund is by far the largest fund in the top 4, with almost £2.1bn of assets under management. It has delivered the lowest income of the top funds, but has still handed investors more than £6,000 of income over the past 10 years on a £10,000 investment.
There’s no clear style winner among the top income funds, although those that have managed to deliver the highest income alongside impressive capital growth have focused on smaller companies – which have performed strongly in recent years. Unicorn, Chelverton and Montanaro all fall into this bracket.
THE BEST OF THE REST
There are just 36 funds that have a 10-year track record and have more than £250m in assets – showing how hard it is for investors to find income funds that have staying power. The 10-year limit means some well-known names such as Neil Woodford or Evenlode Income (B40SMR2) are excluded for not having a long enough track record.
However, there is a broad spread between value strategies, funds using derivatives, small-cap focused funds and those invested predominantly in large caps in the longer list of funds. The funds also range from multi-billion pound giants to much smaller funds, offering something for most investors.
Some funds are a choice between income and capital growth – so are top for income but have delivered much more muted price returns. This is why they haven’t appeared in the top four funds above. Schroder Income Maximiser (B53FRD8), for example, has handed investors almost £7,850 of income over the past 10 years, based on £10,000 invested, but has only grown the original capital to £12,034 in that time.
This fund sits within a group of funds called ‘income maximiser’ or ‘income booster’, which prioritise income over capital growth. These funds generate some income by using ‘derivatives’, which sell some of the potential future growth of the fund’s holdings in exchange for a fee that is used towards the fund’s income.
It means when markets rise the fund will likely not increase as much as its peers. This approach works for investors who want maximum income in the short term and aren’t as concerned about growing their original capital.
Laura Suter, personal finance analyst, AJ Bell