If you’ve reached the stage where you want your nest egg to start generating an income, but can’t afford to have your capital eroded by inflation or your spending, equity income funds could be what you’re looking for. The main aim of such funds is to provide an income by investing in blue-chip stocks paying decent dividends. Typical yields are currently lower than the best savings funds (around 3.2% against 5.5%), but if you hold the funds in your Isa wrapper, higher-rate taxpayers will only have to pay basic-rate tax on their dividend payouts.
In the past five years, the two best-performing funds have been managed by the same man, Invesco Perpetual’s Neil Woodford. His High Income and Income funds have returned 27.1% and 26.9% respectively over the past year, and 107.8% and 104.9% over five years. “He shunned the technology market when it was soaring and was in defensive utility and tobacco stocks last year,” Justin Modray of Bestinvest tells The Daily Telegraph. Given small and mid-caps’ vulnerability to a slowing economy, “large caps could be the main driver of returns [in 2007] as p/e ratios are generally better value than their smaller rivals”, says Justine Fearns of AWD Chase de Vere in What Investment.
But Paul Illot of Bates Investment Services tells The Times that, for those seeking a consistent income, Rathbone Income was best of the top four equity income funds over ten years in terms of steadily increasing dividends.
Funds: Top tips for 2007
In our list of the top ten ‘Personal view’ tipsters for 2006 (issue 313), we didn’t include contributors who had tipped funds. But IFA James Brooke of Anand Associates, who tipped three funds in February and three in June, saw them rise an average of 14.9% and 17.33% respectively – a very creditable return. His best tip was Fidelity Global Property, up 22.8% for the year. But what would he tip for 2007? For bears, the Miton Arcturus Fund, 35% of which is invested in a US-dollar denominated fund and 20% in a tracker of the Credit Suisse Hedge Fund Index. Bulls should look at the Skandia Global Best Ideas Fund. Ten of the UK’s top-rated fund managers offer their best share tips, he says, while Skandia look after the overall asset allocation. Since launch in June 2006, the fund is up almost 20%.