Growing income in a hard patch

Best and worst Pep-qualified trusts

The relentless search for tax-free income at higher rates than many on offer from building society accounts has led savers to invest in a range of equity-linked unit trusts. One of the areas money has poured into in recent years is the UK equity income sector. This is made up of unit trusts that invest at least 80 per cent of their assets in equities.

The shares must have a yield greater than 110 per cent of the FT All Share stock market index, thereby boosting income opportunities. The opportunity for capital growth is also on offer.

Unlike building society accounts, investing in equities carries a risk. They are subject to the vagaries of the stockmarket, as the performance of this sector in the past year shows.

All the 105 unit trusts in this sector have showed a loss in the past 12 months, with the top 10 funds averaging a fall of about 13 per cent.

The bottom 10 funds dropped in value by about 23 per cent, with the average fund showing losses of about 15 per cent.

These figures include the "bid-offer spread", an initial charge of between 5 and 6 per cent levied as soon the investment is made. Among the sector's top performers is Jupiter Tyndall's income fund. Not only has it been top over the past 12 months. It achieved the same results over three and five years, suggesting that its more recent success was not a one-off result. The notional yield on this fund is about 3.9 per cent.

A solid performance comes from Morgan Grenfell's UK Equity Income unit trust, with a yield of about 3.2 per cent. Julia Eynon, a marketing manager, said her company's approach is based on a bottom-up, stock-picking method with about two thirds of the fund invested in large companies, 20 per cent in small firms and the rest in mid-sized stocks.

This year, Morgan Grenfell's approach will be relatively defensive, with investments being held in companies such as Burmah Oil, Barclays, Bass, British Telecom and Abbey National.

Guinness Flight's High Income fund is another top performer, regularly within the leading 25 per cent of funds in the sector. Jack Springman, a director at the company, said: "We aim to deliver a yield of 115 per cent of the FT All Share index.

"What we try to do is identify trends and take a fairly contrarian view of the market, following what may sometimes be out of fashion but still a good stock." The fund currently delivers a yield of about 4.3 per cent.

Also in the top 10 funds is Govett's UK Equity Income unit trust. Richard Bolchover, a director responsible for the fund, said his company used a detailed screen-based system to analyse performance and check yields.

"I took the fund over in December 1992 and since then we have rebalanced it," he said. "It now delivers a yield of about 4.3 per cent, compared to an average of about 3.5 for the sector."

The fund, which looks mainly at stocks in the FT-SE 350 index, is currently invested in a range of building stocks, public utilities and some brewery shares, all of which offer the prospect of higher income. In the coming year, Mr Bolchover expects the market to rally, although not hugely.

Top 10 1 yr(105) 3 yrs(101) 5 yrs(97)

1 Jupiter Income 87.50 174.79 (1) 167.61 (1)

2 Maldon General 87.23 140.00 (19) 150.40 (10)

3 United Friendly UK Eq Inc 87.17 143.11 (13) 165.44 (2)

4 BWD Equity Income 87.02 135.64 (31) 143.55 (14)

5 Morgan Grenfell UK Eq Inc 86.95 158.76 (3) 164.88 (3)

6 Royal Life High Inc 86.92 134.29 (36) 133.64 (40)

7 Guinness Flight High Inc 86.69 142.46 (15) 149.42 (11)

8 Govett UK Equity Inc 86.43 139.56 (21) 128.18 (60)

9 Lazard UK Income 86.42 135.96 (29) 148.73 (12)

10 St Vincent High Inc 86.39 132.55 (41) 132.69 (43)

Bottom 10

96 Kleinwort Benson High Yld 78.50 137.63 (27) 129.59 (51)

97 Prosperity Inc & Growth 78.31 126.37 (70) 112.12 (90)

98 Edinburgh Equity & Inc 78.01 122.37 (81) 135.79 (36)

99 St James Pl UK High Inc 77.93 129.03 (60) --- 100 Allied Dunbar Eq Inc 77.66 120.68 (86) 123.87 (74)

101 NM Income 77.86 119.33 (92) 116.38 (86)

102 Standard Life UK Eq Inc 77.18 119.69 (91) 105.38 (96)

103 Allied Dunbar High Inc 76.63 120.61 (87) 118.58 (82)

104 Allied Dunbar High Yield 75.41 118.77 (94) 123.81 (75)

105 Fidelity Income Plus 74.80 117.80 (95) 102.17 (97)

The table shows the value on 30 January 1995 of £100 invested over one, three and five years. Prices on offer to bid basis with net income re-invested. First ranking on one-year basis; brackets show number of funds in sector and ranking for each time frame.. Source: Micropal

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

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