Do income funds mean low returns?

Should you stick with them or is now the time to move to equities, asks Simon Read

Fixed-income funds have been the best-selling sector for nine months in a row. According to figures from the Investment Management Association, some 25 per cent of all money invested in funds during August – the latest month for which figures are available – went into fixed-income funds.

Millions are still sloshing into bonds and fixed securities as investors believe they are safer. With shares still fluctating wildly, investors and their advisers, are choosing to take as few risks as possible with their savings.

But there's a growing feeling that investors risk losing out by sticking with their safety-first approach. They will have already missed out on a tremendous bear run in the US and could risk missing out as other equity markets recover, experts warn.

"Investors are battening down the hatches," says Ashish Misra, head of investments at Lloyds TSB Private Banking. "They're holding more cash and investing in UK assets that they judge to be safer than those in emerging economies."

New research from the Bank published today shows that 26 per cent of investors increased their cash allocation in the past six month, echoing the Investment Management Association figures. The flight to safety looks set to continue, according to the research, with 19 planning to up their exposure to cash in the next six months.

But Mr Misra believes investors could be making a costly mistake: "Investors need to be wary of the risk of over-trading and knee-jerk responses. People shouldn't follow the market as the market doesn't discount the present, it discounts the future."

In other words, if you're following the market with your investments, you've already missed out on potential future gains. Mr Misra says he's holding overweight positions in Japanese and European stocks.

The latter may seem surprising and risky given the continuing uncertainty over the future of the eurozone.

"But how much of the fundamental uncertainty about Europe is already reflected in prices?" Mr Misra poses.

If, as he believes, the market is valuing stocks lower than they may be worth because of the uncertainty, it follows there could be bargains around among European shares.

"In Greece, for instance, some stocks are at bargain-basement, fire-sale prices," says Mr Misra.

So does he suggest that investors sell up their bonds and start taking a punt on markets again?

"Moving completely away from bonds into equities would be as irrational and knee-jerk as avoiding equities altogether," he says. "Investors should simply have a balanced portfolio, in which risk has a place."

Clive Beagles, co-manager of JOHCM UK Equity Income fund, puts the case for income funds.

"With equities still modestly priced relative to other asset classes, especially UK gilts and corporate bonds, dividend yields rising and the UK economy generally performing better than the media think, we think there is a clear role for an equity income fund as part of a diversified investment portfolio."

Adam Avigdori, co-manager of the BlackRock UK Income fund, is also keen to put the case for keeping savings in income funds.

He says the secret is not to restrict investment to income funds, but have a mixture. Mr Avigdori achieves it by using what BlackRock terms a barbell effect. At one extreme the fund buys high income-paying companies, while at the other, it invests in companies with above-average profit growth potential but which often have lower than average yield.

"The barbell has proven to be very effective in our changing economic environment – we are in a position to be real stock pickers, blending companies with a favourable yield with those with a low or no dividend, allowing us the flexibility to invest in a wide universe of UK equities."

The mix, Mr Avigdori says, are the types of companies which help investors to ride out stormy periods.

"Investors should not be quick to write off income funds – dividends are here to stay and quite frankly, the best way to save for retirement," he says.

Equity-income funds have underperformed their IMA All Companies peers for some time now, but it could be getting time for this to change, says Rob Burdett, co-head of multi-managed funds at F&C Thames River.

"The value style most prevalent in the income sector offers some downside protection at least in relative terms to growth funds, and those companies willing and able to pay dividends are expressing confidence in their own business by distributing profits," he says.

With interest rates looking likely to remain lower for some time, companies paying dividends are looking more attractive, compared to bonds.

"There are a growing number of companies whose shares offer higher income (with the potential for growth), than, for example, the same company's bonds, never mind cash, property and the like," says Mr Burdett.

"In addition, of course, there is something compelling about getting some of your total return in the short term by way of a quarterly dividend cheque."

Alan Higgins, chief investment officer at Coutts, believes the economic evidence is moving increasingly in favour of equities and against investment-grade bonds.

"Returns from bonds have historically become negative when bond markets returns are as high and yields as low as they currently are," he points out. "The greatest risk to bonds is that investors become more confident about the outlook for equities."

Patrick Connolly of AWD Chase de Vere, says: "Investors have been enticed by the perceived security of good-quality, fixed-interest holdings and those brave enough to venture into equities have been largely focused on income producing funds.

"In contrast, perceived riskier investments such as growth equities have been largely ignored and there have been significant outflows."

He points out that equity-income funds are seen as a lower risk way to invest into equities and that many of their underlying holdings – such as tobacco, pharmaceuticals and utilities – are considered quite defensive, as they provide goods or services which people want in all environments.

"The result is that income has become expensive while growth is much cheaper, yet there are still many buyers who seem willing to buy income funds at any price," says Mr Connolly.

"While investors remain nervous and sentiment is gloomy, it is possible that income funds will outperform, or at the very least provide better protection for investors' capital. However, at some point investor sentiment will turn and at the time growth funds can be expected to outperform significantly."

The question is, then, do you believe that we're on the road to economic recovery? Rupert Watson, head of asset allocation at Skandia, believes so.

"Stronger than expected retail sales data, coupled with the ongoing strength in the labour market and lower inflation, suggests the economy should grow over the next few quarters," he says.

Mr Watson concedes that the economy still faces considerable headwinds – such as fiscal tightening, a weak eurozone and recent energy-price increases, but he points to potential good news as soon as next week.

"I think next week's GDP report will confirm that the economy is back on the road to recovery," predicts Mr Watson. "A modest, global economic recovery coupled with less turmoil in the eurozone should support stockmarkets into year-end."

Millions missing out on help with energy bills

A Government scheme aimed at helping those in fuel poverty is failing because no-one has told struggling families about it, according to a poverty charity, writes Simon Read.

Two-thirds of struggling families believe paying this winter's soaring energy bills will cause them financial hardship. Yet almost half – 45 per cent – fail to claim state benefits they may be entitled to.

A price hike of 9 per cent came into force from Monday for millions of customers of SSE, while British Gas, npower and Scottish Power have announced similar increases. The average dual-fuel bill now stands at more than £1,300.

But crucially, seven out of 10 people have no idea that there are cheaper, social tariffs offered by energy companies.

Meanwhile, many struggling families are also unaware of the Government's Warm Front scheme, which hands out grants to vulnerable people in order to help make their homes more energy-efficient.

Turn2us has launched a campaign to highlight the support available to those struggling with their fuel costs at the website www.fuelpovertymap.org.uk. It also offers a grants search database which lists more than 3,000 charitable funds and energy-efficiency grants.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Life and Style
health
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
Arts and Entertainment
The sight of a bucking bronco in the shape of a pink penis was too much for Hollywood actor and gay rights supporter Martin Sheen, prompting him to boycott a scene in the TV series Grace and Frankie
tv
Arts and Entertainment
Lena Headey as Cersei Lannister
TVSPOILER ALERT: It's all coming together as series returns to form
Sport
footballShirt then goes on sale on Gumtree
Voices
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’
voicesGrace Dent on Grange Hill and Terry Sue-Patt
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010
music
Arts and Entertainment
Twin Peaks stars Joan Chen, Michael Ontkean, Kyle Maclachlan and Piper Laurie
tvName confirmed for third series
Sport
Cameron Jerome
footballCanaries beat Boro to gain promotion to the Premier League
Arts and Entertainment
art
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Software Developer / C# Developer

    £40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

    Neil Pavier: Management Accountant

    £45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

    Sheridan Maine: Commercial Accountant

    £45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

    Laura Norton: Project Accountant

    £50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

    Day In a Page

    Abuse - and the hell that came afterwards

    Abuse - and the hell that follows

    James Rhodes on the extraordinary legal battle to publish his memoir
    Why we need a 'tranquility map' of England, according to campaigners

    It's oh so quiet!

    The case for a 'tranquility map' of England
    'Timeless fashion': It may be a paradox, but the industry loves it

    'Timeless fashion'

    It may be a paradox, but the industry loves it
    If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

    Could have done with Osama bin Laden staying alive?

    Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
    New exhibition celebrates the evolution of swimwear

    Evolution of swimwear

    From bathing dresses in the twenties to modern bikinis
    Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

    Sun, sex and an anthropological study

    One academic’s summer of hell in Magaluf
    From Shakespeare to Rising Damp... to Vicious

    Frances de la Tour's 50-year triumph

    'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
    'That Whitsun, I was late getting away...'

    Ian McMillan on the Whitsun Weddings

    This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
    Kathryn Williams explores the works and influences of Sylvia Plath in a new light

    Songs from the bell jar

    Kathryn Williams explores the works and influences of Sylvia Plath
    How one man's day in high heels showed him that Cannes must change its 'no flats' policy

    One man's day in high heels

    ...showed him that Cannes must change its 'flats' policy
    Is a quiet crusade to reform executive pay bearing fruit?

    Is a quiet crusade to reform executive pay bearing fruit?

    Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
    The King David Hotel gives precious work to Palestinians - unless peace talks are on

    King David Hotel: Palestinians not included

    The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
    More people moving from Australia to New Zealand than in the other direction for first time in 24 years

    End of the Aussie brain drain

    More people moving from Australia to New Zealand than in the other direction for first time in 24 years
    Meditation is touted as a cure for mental instability but can it actually be bad for you?

    Can meditation be bad for you?

    Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
    Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

    Australia's first-ever Eurovision entrant

    Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine