Equity income funds have been in the papers a great deal recently, with investors being encouraged to shelter from the credit-crunch volatility by buying into stocks paying chunky dividends, preferably run by experienced managers. But if you just follow the tips that independent financial advisers (IFAs) give in the weekend press, you could well be missing out. The fact that most IFAs depend on commissions from fund management groups, means that it’s rare to see them recommend anything other than unit trusts. For example, in the equity income sector, Neil Woodford’s name is bandied about a lot. Woodford’s vast £6.2bn Invesco Perpetual Income fund is up 142% over five years, so it’s no surprise he draws a lot of attention. Picking his ‘Dream Team’ for a fantasy portfolio, Paul Farrow in The Daily Telegraph says “Neil Woodford of Invesco Perpetual is consistently at the top of the tables and is never afraid to make bold moves into areas that rivals avoid. It would take a brave coach to substitute Woodford.”
Woodford is an undeniably impressive performer, especially if you compare him to his peers. But with a less-than-exciting yield of 3.2% (not to mention an upfront fee of 5% and an annual charge of 1.5%), investors who dig deeper can find more attractive options. Trustnet.com shows that investment trusts Glasgow Income (GLS) and Henderson High Income (HHI) have seen their net asset values rise 150.7% and 155.9% respectively in the same period; and pay far chunkier yields of 5.6% and 4.8%. But as IFAs don’t earn any commission from recommending them, you don’t tend to hear about them.
Another area rarely recommended by IFAs, for the same reason, is the ETF sector, where you can also find cheap, simple income-paying funds. The Lyxor FTSE 100 ETF (L100) tracks the main UK index and pays out just under 3%. With a total expense ratio of 0.3%, it’s about a fifth of the cost of a unit trust bought through a fund supermarket (see Lyxor ETF).
And, says David Stevenson in Investors Chronicle, “you can find even more compelling propositions, such as the iShares UK Dividend Plus ETF (IUKD)”, which tracks the 50 highest-yielding shares in the FTSE 350. The fund has an income of nearly 4% and has returned 40% since 2005 (see iShares.co.uk).
For more information, call Glasgow Investment Managers, 0141 572 2700, or Henderson Global Investors, 0207 818 1818.