Investing For Income: Why clear aims matter more than high yields

THE LAST few weeks of the financial year will see a rush for corporate bond PEPs, the most popular investment for above average income.

Corporate bond PEPs appeal to those nervous about equity prices heading down or sideways, or to those who have made significant profits elsewhere and want to park them in a secure, lower-risk home.

But some experts believe investors could be making a mistake in the long run. Corporate bonds do offer a high and reasonably risk-free level of income, but this is unlikely to rise much. And they show little prospect of high capital growth.

Over five years or more, equities have almost always outperformedconventional investments, including gilts and company loan stocks.

"If you want a sensible level of income that will grow year on year, then you should consider income funds," says John Irons, of SG Asset Management. "Corporate bond funds are fine if all you want is immediate income. But investors should stop being drawn by the advertised high yields and think about their real aims and objectives."

SG Asset Management has recently launched the SocGen UK Income unit trust, its first to be directly run by Nicola Horlick. She heads the investment arm and is one of the best-known fund managers in the country.

"We aim to yield between 10 and 20 per cent more than the FTSE All Share, the most widely based stock market index," says John Irons. "We aim to grow this every year while showing a better rate of capital growth than the index."

The new fund will have an initial yield of around 3.2 per cent, much lower than that available with corporate bonds. Here, the mainstream funds that buy investment rated company loan stocks issued by the UK's leading companies are yielding around 6 or 7 per cent.

Some PEPs with high income rates of more than 7 per cent are also on offer but they invest in sub-investment grade stock. These are issued by companies seen to be higher risk and need to pay higher rates to attract money. Their prospects may improve, but there is always a fear that one may default.

Corporate bonds are investing in fixed-interest stock. They usually have portfolios of various types of corporate loans and, sometimes, government- issued gilt-edged stock. If a company issues stock to be repaid in 2025 with a coupon of 7 per cent, it will pay holders pounds 7 for every pounds 100 they invest until it repays the loan. If inflation falls, the value of this fixed interest stock is more attractive and its trading price is likely to go up. If inflation rises, the price is likely to fall. At current inflation levels, the prospects are low for any significant capital growth.

In equities, the value of a company's ordinary shares depends on several factors, the most important being its prospects. The better its prospects, the more demand there is for its shares and the higher they will rise. Income fund managers hope to increase their payouts by more than the rate of inflation. This is unlike the income from a corporate bond, which is relatively fixed and will therefore be reduced in value by the rate of inflation.

Jason Hollands, of BESt Investment, a firm of independent financial advisers, says: "If you want to maximise your income, choose corporate bonds. But if you want a mixture of a rising income and capital growth, there is still a strong case for buying income funds that invest in good quality equities."

`The Independent" has published a free 28-page Guide to PEPs. The guide, sponsored by Scottish Widows, is available by calling 0345 678910.

The Best Income Funds

Mainstream Corporate Bond PEPs

CGU PPT Monthly Income Plus (tel: 0181-686 9818) min investment pounds 5,000, 4% initial charge, 1.25% annual charge;

Legal & General (01222 448412) min pounds 1,000, no initial charge, 0.5% annual charge; M&G Corporate Bond (01245 390390) - min pounds 1,000, no initial charge, 1% annual charge, exit fees

Corporate Bond Funds investing in sub-investment rated stock - higher risk

Fidelity Extra Income (tel 0800 414110) - min investment pounds 1,000, 3.25% initial charge, 1.25% annual charge; M&G High Yield Corporate Bond (01222 448412) - min pounds 1,000, no initial charge, 1.25% annual charge, exit fees if cashed in within five years

Equity and Income Funds

BWD Rensburg Equity Income (0113 245 4488) min investment pounds 500, 4.5% initial charge, 1.5% annual charge; Jupiter Income (0500 050098) min pounds 500, 5% initial charge, 1.5% annual charge;

Newton Income (0800 614330) min investment pounds 1,000, 6% initial charge, 1.25% annual charge; Soc Gen UK Income (0808 100 254368) - min pounds 1,000, 5.25% initial charge, 1.5% annual charge; Newton Income (0800 614330) - min investment pounds 1,000, 6% initial charge, 1.25% annual charge

Selected by the independent advisers BESt Investment (0171-321 0100); and Pretty Technical Services (0171-377 5754).

peopleGerman paper published pictures of 18-month-old daughter
Arts and Entertainment
'A voice untroubled by time': Kate Bush
musicKate Bush set to re-enter album charts after first conerts in 35 years
Life and Style
Arts and Entertainment
Robin Williams' life story will be told in a biography written by a New York Times reporter
arts + ents
Life and Style
food + drink
Life and Style
ebooksAn evocation of the conflict through the eyes of those who lived through it
Roger Federer is greeted by Michael Jordan following his victory over Marinko Matosevic
tennisRoger Federer gets Michael Jordan's applause following tweener shot in win over Marinko Matosevic
peopleJustin Bieber accuses paparazzi of acting 'recklessly' after car crash
Arts and Entertainment
Oppressive atmosphere: the cast of 'Tyrant'
tvIntroducing Tyrant, one of the most hotly anticipated dramas of the year
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Client Services Executive / Account Executive - SW London

£23000 - £26000 per annum: Ashdown Group: Account Executive / Client Services ...

PA to CEO / Executive Secretary

£36000 - £38000 per annum: Ashdown Group: Executive PA to CEO & Executive Dire...

Generalist HR Administrator, Tunbridge Wells, Kent - £28,000.

£25000 - £28000 per annum: Ashdown Group: Generalist HR Administrator - Tunbri...

Senior C# Developer (.NET, C#, JMS, TDD, Web API, MVC, integrat

£45000 - £75000 per annum + benefits+bonus+package: Harrington Starr: Senior C...

Day In a Page

Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

Kate Bush shows a voice untroubled by time

A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
Robot sheepdog technology could be used to save people from burning buildings

The science of herding is cracked

Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

This tyrant doesn’t rule

It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?
Rachael Lander interview: From strung out to playing strings

From strung out to playing strings

Award-winning cellist Rachael Lander’s career was almost destroyed by the alcohol she drank to fight stage fright. Now she’s playing with Elbow and Ellie Goulding
The science of saturated fat: A big fat surprise about nutrition?

A big fat surprise about nutrition?

The science linking saturated fats to heart disease and other health issues has never been sound. Nina Teicholz looks at how governments started advising incorrectly on diets
Emmys 2014 review: Can they genuinely compete with the Oscars

Can they genuinely compete with the Oscars?

The recent Emmy Awards are certainly glamorous, but they can't beat their movie cousins
On the road to nowhere: A Routemaster trip to remember

On the road to nowhere

A Routemaster trip to remember
Hotel India: Mumbai's Taj Mahal Palace leaves its darker days behind

Hotel India

Mumbai's Taj Mahal Palace leaves its darker days behind
10 best pencil cases

Back to school: 10 best pencil cases

Whether it’s their first day at school, uni or a new project, treat the student in your life to some smart stationery
Arsenal vs Besiktas Champions League qualifier: Gunners know battle with Turks is a season-defining fixture

Arsenal know battle with Besiktas is a season-defining fixture

Arsene Wenger admits his below-strength side will have to improve on last week’s show to pass tough test
Pete Jenson: Athletic Bilbao’s locals-only transfer policy shows success does not need to be bought

Pete Jenson: A Different League

Athletic Bilbao’s locals-only transfer policy shows success does not need to be bought
This guitar riff has been voted greatest of all time

The Greatest Guitar Riff of all time

Whole Lotta Votes from Radio 2 listeners
Britain’s superstar ballerina

Britain’s superstar ballerina

Alicia Markova danced... every night of the week and twice on Saturdays
Berlin's Furrie invasion

Berlin's Furrie invasion

2000 fans attended Eurofeurence
‘It was a tidal wave of terror’

‘It was a tidal wave of terror’

Driven to the edge by postpartum psychosis