High yield and emerging market debt funds have tended to generate the highest income payouts from the fixed income world over recent years, although a handful of less risky bond funds have managed to outperform.
A basic tenet of investing is that the more risk taken the higher the potential returns on offer and this holds true when investors are using funds to generate an income. As would be expected, investors who stuck with UK government bonds have been paid less than those that moved into riskier parts of the market where higher yields are on offer.
Using FE Analytics, we worked out the income distributions from each fund in the Investment Association’s fixed income sectors, seeing how much was paid out on an investment of £10,000 made on 1 January 2013 through to the end of 2017.
Source: FE Analytics
As the table below above, it was the IA Sterling High Yield sector that has produced the highest income over the five years in question as its members paid out an average of £2,626.99 on the initial investment of £10,000. It is closely followed by the IA Global Emerging Markets Bond sector’s £2,239.32 payout.
The average IA Sterling Strategic Bond fund distributed £1,852.98 while for the IA Sterling Corporate Bond sector the average stands at £1,689.15.
At the bottom of the table are the two UK government bond peer groups: the average IA UK Gilts fund has distributed £900.76 over the past five years while an initial investment of £10,000 into the average IA UK Index Linked Gilts fund led to a payout of just £339.83.
This trend can be seen on an individual fund level although a handful of funds that don’t focus on high yield or emerging market bonds have managed to pay some of the highest dividends.
At the very top of the table is Doug Forsyth’s $4bn Allianz US High Yield fund with its five-year payout of £3,807.85. Although this fund resides in the IA Global Bonds sector, its name reveals that it is focused on high yield bonds – specifically those issued by US companies.
Indeed, of the top 20 highest income-paying fixed income funds, 12 are either from the IA Sterling High Yield sector or are in another peer group but concentrate on this part of the market. Royal London Sterling Extra Yield Bond, Schroder High Yield Opportunities and JPM Global High Yield Bond are some of the names found here.
Source: FE Analytics
The $10bn Templeton Emerging Markets Bond fund, which is managed by Michael Hasenstab and Laura Burakreis, has paid out the second highest amount - £3,368.65. This is another IA Global Bonds fund albeit one that invests in emerging market debt.
The other two emerging market bond funds in the top 20 – both of which reside in the IA Global Emerging Markets Bond sector – are Old Mutual Emerging Market Debt and Pimco GIS Emerging Asia Bond.
Other sectors are represented at the top of the income table, with three focused on investment grade bonds and two taking a flexible, strategic bond approach.
GAM Star Credit Opportunities USD (which paid out £3,114.45 on an initial £10,000 investment) and GAM Star Credit Opportunities GBP (which paid out £2,923.37) are both run by FE Alpha Manager Anthony Smouha and Gregoire Mivelaz. The funds also have the same process – they invest in bonds from investment grade companies but concentrate on issues lower down the company's capital structure in order to capture higher returns.
This approach has proven successful and both funds are in top decile of their respective sectors over three and five years for total returns; GAM Star Credit Opportunities GBP is the IA Sterling Strategic Bond sector’s best performer on a five-year view after making 58.24 per cent, compared with an average of 19.42 per cent.
Source: FE Analytics
Liontrust Monthly Income Bond sits in 15th place after paying out £2,789.78 over the five years we looked at. The £291.5m fund is a member of the IA Sterling Corporate Bond sector and has a focus on bonds issued by high-quality companies, analysing factors such as the track record of a firm’s management team, its business strategy, earnings performance and the industry’s barriers to entry.
AXA Framlington Managed Income, which is an IA Sterling Strategy Bond fund managed by George Luckraft, is ranked 11th in this research after paying out £2,889.22. Luckraft tends to invest in bonds issued by UK companies and seeks out those that will deliver above-average income.
The final non-high yield or emerging market debt fund in the top 20 is City Financial Diversified Fixed Interest, which is another strategic bond portfolio; it has paid out £2,769.02 over five years, ranking it 16th. Managed by Mark Harris, this is a fund of funds portfolio that counts the likes of Angel Oak Multi-Strategy Income, Schroder High Yield Opportunities and TwentyFour Select Monthly Income as top holdings.