‘I’m not a sadomasochist but we like a falling price’

Income funds tend to favour vast companies that pay solid dividends. Names such as consumer goods producer Unilever, oil company Shell and the bank HSBC, will often feature in the top 10 holdings of many income-generating funds, meaning your portfolio may not be as diversified as you think.

For a more blended approach, the £1.2bn Schroder Income Maximiser fund, run by Nick Kirrage and his team, offers an alternative.

Included in The Telegraph’s “Income 10” list of the best dividendpaying portfolios, this fund invests where others won’t and targets an income of 7pc a year. Mr Kirrage explains how he sustains that income and where he finds value where others see a lost cause.

There are essentially two things going on. We have the underlying fund that targets a yield of 3.5pc to 4pc, investing in income-generating stocks that we see as being undervalued.

We then have a “derivative overlay” strategy, which sounds incredibly complicated but is actually very simple. In practice we are selling future gains to produce income.

So, for each stock, if it grows more than a certain amount – this can be 8pc, 12pc, 20pc, depending on the stock – over a three-month period, we give that growth away and receive an income in return. It is simply a very efficient and mechanical way of turning capital into income.

We run the fund on the basis that we will be able to find bargains in areas where other people turn up their noses. We like most of the stuff that others don’t, which at the moment means we are invested in banks, mining, supermarkets and utilities – sectors that aren’t getting much attention from other income funds.

We are looking for once-loved, enduring businesses that are in trouble

CV: Nick Kirrage

Mr Kirrage heads Schroders’ ers’ “value team”. Specialising in investing in recovering companies, he began working g at the fund group as a researcher in and have the potential to recover. Media company Pearson is our largest holding – a firm that everyone used to think was great and now has a very negative news story surrounding it.

We think its problems are short term and it is trading at a very low valuation. Over six years it should be able to turn itself around, and it will pay us a nice dividend while we wait and see if our bet is right.

Schroders fund manager Nick Kirrage tells Harry Brennan why he invests in the stocks everyone else hates

We still have to outperform the market, so we need a certain element of growth in the fund.

To achieve this, we employ the same strategy – we look for growth in underappreciated companies that are improving or recovering. Examples would be Pearson or the supermarket Morrisons. For these companies, expectations are in the toilet and our view is that the only way is up.

We are not sadomasochists, we aren’t always hoping for profit warnings and companies to fail, but there is something alluring in a falling share price – there might just be a bargain to be had. We use bad headlines to make good investments.

A Around 15 years ago everyone hated toba tobacco stocks and said a business mod model that kills your customers would nev never work out. But today tobacco stoc stocks are trading at huge prices. So we are always looking to figure out whe whether the glass is truly half empty and whether it can be refilled.

It’s a fund for everyone, but it does so something different. We don’t have so some of the companies a lot of o other income investors will have,

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