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Hunt for income: three funds yielding 20 times the base rate

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Written by: Paloma Kubiak
10/08/2016
Beleaguered savers have borne the brunt of the low interest rate environment with high paying interest accounts disappearing. Here are some words of wisdom for struggling income seekers.

The Bank of England’s Monetary Policy Committee unanimously voted to cut the Base Rate to 0.25% last week, dealing another blow to long-suffering savers.

This is the lowest the rate has ever been and is a long way from the record high 17% interest rate recorded in November 1979.

As high paying interest rate accounts have pretty much disappeared, savers and investors will need to look elsewhere to get any decent return on their money.

Adrian Lowcock, investment director at Architas, said the Bank of England policy which has been to keep interest rates low and provide liquidity through quantitative easing looks set to continue for the foreseeable future and has “only made matters worse for income seekers” as cash and gilt yields have continued to fall.

However, there are still income opportunities out there with many funds offering a yield of over 5% without requiring the investor to take on huge amounts of risk.

How can savers make their money work harder?

Lowcock says diversification is key as generating income from a range of different sources should reduce volatility. He says investors should be wary of high yields as while they could indicate a great opportunity, they could also highlight that there’s an issue with the investment, such as an imminent dividend cut or that the business is in trouble.

He says investors should look for growing dividends: “If you can, look for companies which have smaller but growing dividends. As a company grows its dividends it will boost the share price, as it attracts more investors, helping to grow your capital.”

Here are three funds which yield 20 times the Bank of England Base Rate of 0.25%:

Fidelity Enhanced Income: The income is taken from two sources. The core of the fund is run by Michael Clark as a traditional income strategy investing in blue chip UK companies which tend to have attractive and consistent dividends. The fund is co-managed by David Jehan, who runs the other income generating strategy, using derivatives to boost the income yield. He sells call options and uses the proceeds to boost the income. Lowcock says such a strategy does reduce the capital growth potential of the investment, but it provides a significant boost to income. “Given the conservative approach of the managers this fund tends to protect investors better in falling markets and is less volatile than the UK Equity Market as a whole.” The historic yield is 6.89%.

Invesco Perpetual High Yield Bond: Managers Paul Read and Paul Causer are highly experienced and believe the key to success is on knowing what information is relevant at what time. “The managers combine their economic outlook with stock picking skills to identify bonds which look attractively priced,” says Lowcock. While the fund is predominately invested in European high yield bonds, the managers can hold as much as 30% in corporate bonds. The historic yield is currently 5.88%.

Schroder Global Real Estate Securities: Managers Tom Walker and Hugo Machin use their analysis of the global economic landscape to determine the best geographical opportunities and combine that with detailed stock analysis to pick the best investment opportunities. Focus is primarily on large cap property companies which offer the greatest liquidity. Lowcock says: “As the fund invests in property shares and not bricks and mortar investors don’t share the recent liquidity issues seen in other property funds but in the short term, it will experience equity-like volatility. The fund has a historic yield of 5.35%.

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