Daily Mail

How to stop low rates hurting your nest egg

Invest in the funds that offer a healthy income

- by Daniel Flynn

WITH no end in sight to the pitiful interest rates being offered by High Street banks, UK Equity Income funds could provide a highly fruitful alternativ­e for savers looking to get some income on their cash.

By investing in the highest yielding Footsie stocks, the funds often let savers have their cake and eat it by offering superior income to assets like bonds and cash while also growing the underlying value of their nest egg.

In its latest half-yearly Income Study, asset manager Sanlam has made a ‘White List’ of UK Equity Income funds which have achieved the best combined income and growth over five years.

It has also made a ‘Black List’ of consistent underperfo­rmers over the same period, which investors are advised to stay away from for the time being.

This study is the first since the Investment Associatio­n – the industry body for UK funds – moved the goalposts for Equity Income products in March.

PREVIOUSLY, Equity Income managers were required to generate 10pc more income than that achieved by the whole UK stock market. But following complaints that this would force managers into highyieldi­ng stocks which they did not necessaril­y believe in just to tick boxes, the income requiremen­t was reduced to the same level as the UK stock market.

A 10pc difference may sound trivial, but supporters of the change argue it allows investors seeking income exposure to a huge number of new funds which now qualify.

Darius McDermott, managing director at Chelsea Financial Services, said: ‘The new yield requiremen­ts are sensible in my view. It means that some very good funds can return to the sector and managers are not forced to chase a yield for the sake of it.

‘There have been some suggestion­s that fund managers could cut dividends as a result but I don’t think this will happen. There is no need now and all are aware of how important income has become to investors.’

According to Sanlam, the strongest performing UK equity fund following the changes is the £923.4m Miton UK Multi- Cap Income fund, managed by investment veteran Gervais Williams and Martin Turner. By investing in a wide variety of firms across many sectors, the fund has returned 128pc over five years, vastly outperform­ing the average achieved by rivals. It has also provided an impressive income of £319 on a £1,000 investment over the same period.

The £ 129.2m Slater Income fund, co-managed by Barrie Newton and Mark Slater, was named the second strongest performer over the period. By using a similar highly diversifie­d approach to Williams and Turner, the fund has returned a decent 93pc over five years and has generated £304 of income on a £1,000 investment.

At the other end of the spectrum, the £ 198.6m HSBC Income fund, comanaged by Oliver Nils Gottlieb and Tobyn Dickinson, came in as the big- gest UK Equity Income dog. The fund, which invests a large amount of investors’ cash in financial companies, has returned just 47.7pc over five years, and has generated income of just £233 on £1,000 over the same period.

Another poor performer was the £174.5m Aberdeen UK Equity Income fund, managed by the firm’s Pan European Equity team.

Aberdeen said the fund’s slack returns in 2014 and 2015 can be put down to over-investment in high dividend paying firms with low growth, and said performanc­e has picked up since the beginning of 2016.

Regardless of performanc­e, Phil Smeaton, chief investment officer at Sanlam, points out that Equity Income funds are most effective in conjunctio­n with other types of investment funds.

‘While funds have greater flexibilit­y, there is a limited pool of stocks available, and investors therefore need to ensure they have the right blend of funds to make sure they are diversifie­d.’

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