Higher income fund cuts its rate

THE HYPO Foreign & Colonial Higher Income Fund is to have its income cut from 10 to 9 per cent following concern that capital was being eroded to maintain its high-income level, writes Vivien Goldsmith.

Simon James, managing director of Hypo Foreign & Colonial Marketing, said: 'We regularly review the target income. Currently, low interest rates and the high probability of these rates going still lower make it prudent to adjust the target income rate now.'

The change will not take place until June. At the same time, the managers are reducing the annual management fee from 1.5 to 1.25 per cent, and the initial charge will also be reduced from 5 to 4 per cent until 15 May. Investors have not recovered the initial charge and are looking at losses of around 4 per cent on top.

The fund, which invests in blue-chip shares and uses futures and options to generate extra income, has nevertheless been phenomenally successful in attracting investors - it has taken in pounds 500m.

Peter Hargreaves, at the unit trust brokers Hargreaves Lansdown, has been enthusiastic. 'We have always recommended to F&C that they should reduce the yield if it is endangering the fund's capital performance.' Morgan Grenfell is holding the income on a similar plan at 10 per cent.

A joint statement from F&C and Morgan Grenfell last year pointed out: 'Neither the capital nor the level of income are guaranteed. Investors should remember that these funds are not comparable with building society accounts.'