Income-seeking investors need to do their research before picking or a fund, or they may end up disappointed. Number-crunching by Morningstar reveals that at least 38 funds with “Income” in their title are yielding less than 2%.
Peter Sleep, senior investment manager at 7IM, says: “The naming of funds is something that the FCA is looking at and I understand it takes a dim view of funds which mislead with their name.”
The FCA handbook says that fund names should not be misleading. Key investor information should allow consumers to “understand the nature and risks of the investment product that is being offered to them”
However, Sam Lees, head of research at Fund Expert, says it is also up to investors to do their homework: “If a fund is designed to generate an income then it can call itself an income fund; the fact the income may not be what the investor is after is a secondary issue. If that fund only yields 1% and the investor needs 3%, that isn’t the fault of the fund.”
Analysis by Morningstar found that the lowest-yielding UK-listed fund with “Income” in its title is Marlborough US Multi-Cap Income, which yields 0.44%. According to its factsheet, the fund’s objective is to deliver a “growing level of income with the potential for some capital growth”. Yet investors could earn a greater income by putting their money in a high street savings account – by doing so they also would not have to pay an annual management fee and their capital would not be at risk.
The M&G Gilt & Fixed Interest Income fund yields just a fraction more at 0.46%. Its objective is to “provide income and capital growth”.
Some seven UK-listed funds whose titles contain the word “Income” are yielding less than 1%. Among them are the Julius Baer Strategy Income and Allianz Oriental Income funds, which yield 0.8% and 0.84% respectively.
Marlborough says there are other share classes of its fund available that may yield more. Its unbundled ‘P’ class units, for example, yield 0.92%, with an ongoing charge of 0.85%. The firm has also changed the way that charges are deducted, which should help boost the yield in future. Where previously charges were deducted from income, they are now deducted from capital – this means the yield should rise although the capital growth may fall. A spokesman for Marlborough said: “We anticipate a significant boost to the yield as a result of charges now being deducted from capital rather than income.”
There are specific requirements that funds must meet in order to be eligible for certain income-focused investment sectors. For example, for a fund to qualify the Investment Association’s UK Equity Income sector a fund must yield at least as much as the FTSE All Share on a rolling three-year basis and at least 90% on a one-year basis. Currently the index yields 4.7%.
Global Equity Income funds must match the MSCI World Index yield over three years, and UK Equity and Bond Income funds must deliver at least 120% of the All Share yield.
However, not all funds with Income in their title are in these specific income sectors, so do not have to meet yield requirements. The M&G fund, for example, is in the UK Gilts sector, which has no yield hurdle. The Marlborough fund, meanwhile, is in the North America sector, whose main requirement is that at least 80% of assets must be in North American equities.
Lees points out that this is where many self-directed investors may get into trouble, as cherry-picking funds in the first place is hard enough without knowing which of the myriad share classes you should select. He says investors focused on income may do better choosing a "fund of funds" or multi-asset option from the Mixed Asset sectors as these often have explicit yield targets.
Sleep adds: “Fund names seem to go in and out of fashion. About 10 years ago fund houses seemed to like the name ‘special situations’, more recently they have been launching ‘income’ funds. But some of these do not do what they say on the tin and it’s a concern if the term income becomes tarnished as a result.”
