Get the low-down on shares

Click to follow
The Independent Online
IT MAY seem perverse to argue the case for equity investment. After all, the leading stock market indices have fallen more than 20 per cent since mid-July, writes Tony Lyons.

But many experts think that just because of this it could now be a good time. "We could be near the bottom of the market," says Iain Lynn, who manages Shires Income Investment Trust, one of the best performing high yielding funds. "There is good value in the market now and we are buying on the way down. If you can buy quality stocks such as P&O, yielding around 7.5 per cent, Tompkins, around 7 per cent, BAT and NatWest, around 6 per cent, you cannot go far wrong in the long term."

Investing in companies such as these will not only give you a good level of income but also the prospect of making significant capital gains. And if you put them in a PEP wrapper then they will be free of income and capital gains tax.

However, the dividends you receive from a managed or self-select PEP will be diluted from next April because of the planned change in advanced corporation tax. This means the current 20 per cent rebate will be cut to 10 per cent for PEP holders for five years, after which it will disappear.

You can invest directly in high yielding stocks that will pay you an income through regular dividends, but this will take time, a lot of research and quite a bit of money. There is, however, a solution. There are more than 100 high-income unit and investment trusts that will provide you with a good level of income, the prospects of capital growth, and do so with less risk than if you tried to create your own portfolio.

The definition of a high-income fund is one that carries a yield in excess of 120 per cent higher than that on the FT-SE all share index, which measures the share price movement of our biggest 847 companies. As this now yields a notional 3.6 per cent, any with a yield over 4.4 per cent is a high- income fund.

The high-income sector, excluding corporate bond PEPs, contains a number of specialists, which invest in gilts, convertible and preference shares, and some, such as Dartmoor Investment Trust, that specialise in esoteric stocks such split-capital investment trusts.

"In today's climate it is probably better to look at funds with a high gilt and fixed interest element if you are risk averse and looking for income," says Roddy Kohn, a Bristol -based IFA. "Funds such as HSBC Income and Henderson Geared Income & Growth offer good defensive strategies."

An example of the type of fund recommended by Mr Kohn is Fidelity High Income, where the portfolio is half invested in gilts, half in ordinary shares. "Our aim is to deliver a better long-term return than a tracker fund with low risk," says Tim McCarron, of Fidelity. "Apart from gilts we focus on large companies that will deliver rising dividends and growth, such as Boots."

The starting point with income funds is beating inflation, according to Ian Millward, of Chase de Vere. "If you can get a good income from a fund that also grows faster than inflation, you'll be doing okay. Historically, income funds have been some of the best performers. Look to leading management groups, where even if there has been a blip in the short term, you should continue to do well."

He particularly likes the high income funds from Credit Suisse, HSBC, Jupiter and Perpetual.

Another recommended fund is City of London Investment Trust - "an equity fund with a rising yield and a sparkling performance", according to Mr Kohn. The fund's success, in common with a number of other good performers such as Shire Income, is because of an investment policy change five years ago. Before that, it had a value strategy, which meant buying shares in companies that were seen as undervalued and neglected. But the advent of a low-inflation era led it to switch to growth companies that would produce rising income as well as capital appreciation.

When looking at income funds, do not be too greedy. You can get very high yields indeed, but at a risk to your capital. A case in point has been the F&C High Income Fund. Launched in 1993 it now yields just under 9.8 per cent. But investors in the unit trust have seen their capital badly eroded. While they have received their dividend cheques, the unit price is now just over 19p compared with its 25p launch price, meaning that a pounds 1,000 investment at launch is now worth less than pounds 770.

Contacts: City of London Investment Trust and Henderson Geared Income & Growth Investment Trust, 0171-410 4100; Shires Income Investment Trust, 0141-572 2700; Fidelity, 0800 414161; HSBC, 0800 289505; Jupiter, 0171- 314 7500; Credit Suisse, 0171-426 2929; Perpetual, 01491 416123.

income from equities

Top-performing high-income funds (bid to bid, income reinvested) excluding fixed interest

Over one year (to 30/9/98)

Fund % growth

Aberdeen High Income Investment Trust 45.5

Dartmoor Investment Trust 36.6

Cairngorm BS Units Investment Trust 26.8

Exeter High Income 22.5

M&G Recovery Geared Investment Trust 19.3

CF GOY High Income 17.9

Shires Income Investment Trust 18.8

Premier Dividend 15.2

Guinness Flight Income Share 14.1

M&G Income Geared Investment Trust 13.4

FT-SE All Share -2.0

Over five years

Dartmoor Investment Trust 125.5

Shires Income Investment Trust 77.7

Dunedin Income Growth Investment Trust 74.5

Temple Bar Investment Trust 74.2

City of London Investment Trust 72.8

Gartmore Scotland 70.1

Premier Dividend 69.7

Glasgow Income Investment Trust 69.5

Fleming Income & Capital Units Investment Trust 69.3

Jupiter Income 68.1

FT-SE All Share 82.1

Sources: Reuters Hindsight, Micropal