Ask Citywire: What are the best funds for generating income?

Why do you not recommend any investment trusts instead of unit trusts?

Well done Richard Harris,such sound advice for the retirement portfolio,and totally unbiased!

Yes I agree with S Turner. Can you please recommend Investment trust next?

With unit trust I find that even before my investment starts earning me anything, I am charged 5% + in initial fees and than 1% + annual charges. I know the Co have to make their money from somewhere, BUT we , the readers want to maximise ouur income.

Buy through a fund supermarket eg Hargreaves Lansdown, Fidelity or Chelsea for example and get your 5% back for a start. Some also return part of the annual charges too

That's a fair question on investment trusts. There's no inherent bias against ITs in Citywire Selection, but there's a smaller universe to choose from and in this case it's difficult to provide a range of recommendations.

One investment trust we do feature in the Income sector is the Edinburgh Investment Trust which has been going since 1889 and is currently run by Neil Woodford (yes, him again!) who took it over and turned the performance around in late 2008. However it invests solely in equities and mostly UK equities at that, so is inherently much riskier than the funds we've highlighted above.

You can read our latest write-up of the trust here - http://bit.ly/aWzmOW - and the trust factsheet here - http://bit.ly/94uNSq.

On the absolute return side we do feature three investment trusts - BH Macro, BlueCrest AllBlue, and the Ruffer Investment Company (which was a recent Fund of the Week - http://bit.ly/aDqbV0). Be aware that BlueCrest and Ruffer are currently trading at a premium. Info on all these can be found via http://www.citywire.co.uk/money/selection/absolute-returns/profiles.aspx.

Also you need to bear in mind that there are dealing costs associated with buying and selling investment trusts, so depending on how you go about investing it may turn out to be more expensive than investing in funds.

Hope this helps

Rich

Excluding some volatility in returns over the years, is it realistic to expect the income to rise at least in-line with inflation (CPI or RPI) over the long term, with these funds.

If not, how would it be best to protect the real value of any income, without resorting to annuities?

Hargreaves Lansdown rebate half the annual charges automatically, so will Chelsea Financial Services - if you ask them!

I have made my portfolio as follows. Can you please improve on this. I want safe investment with 'some' growth prospects. Sorry for long list.

Holding name % of this portfolio

AEGON High Yield Bond Acc 1.00%

AEGON Strategic Bond Fund Acc 0.26%

Aberdeen Asia Pacific OEIC 0.52%

Aberdeen Emerging Markets Acc 1.60%

Aberdeen World Equity Acc 1.69%

Allianz PIMCO Gilt Yield Fund Inc 0.86%

Allianz RCM BRIC Stars Fund 1.70%

Artemis Income Fund Acc 2.99%

Artemis Income Fund Inc 2.23%

Artemis Strategic Assets Fund Acc 0.43%

Axa Framlington UK Select Opps Acc 1.50%

Baring Global Bond Trust 0.26%

BlackRock Continental European Acc 0.52%

BlackRock Gold & General Acc 1.11%

CF Miton Special Situations Prtflo A Acc 1.05%

City Fin Strategic Gilt Fund A Acc 0.84%

Ecclesiastical Amity International Fund 2.72%

Ecclesiastical Higher Income Fund 2.33%

Fid FIF MoneyBuilder Income Fund (Gross) 0.52%

Fid FIF South East Asia Fund 0.40%

Fid FIF Strategic Bond Fund Acc (Gross) 1.13%

First State Asia Pacific Leaders Acc 2.13%

First State Gl Listed Infrastructure Acc 0.52%

First State Global Emerging Mkts Leaders 1.10%

First State Global Resources Fund 0.55%

First State Greater China Growth Fund 1.20%

First State Indian Subcontinent Acc A 3.14%

GLG Global Corporate Bond Fund A Acc 1.62%

GLG Global Corporate Bond Fund A Inc 0.26%

Gartmore China Opportunities Fund 0.52%

Henderson Global Technology 0.34%

INVESCO PERPETUAL Corporate Bond Acc 0.97%

INVESCO PERPETUAL Distribution Acc 0.52%

INVESCO PERPETUAL Global Smaller Cos Acc 1.14%

INVESCO PERPETUAL High Income Acc 10.99%

INVESCO PERPETUAL Income Acc 1.85%

INVESCO PERPETUAL Latin American Fd Acc 0.91%

INVESCO PERPETUAL Mnthly Income Plus Acc 0.78%

INVESCO PERPETUAL Tactical Bond Acc 0.27%

INVESCO PERPETUAL Tactical Bond Inc 0.85%

Investec Emerging Markets Debt A Inc 1.20%

Investec Emerging Markets Debt Acc 0.85%

Investec Global Bond Fund 1.31%

Investec Strategic Bond Acc 0.60%

JOHCM UK Equity Income Fund Acc 1.56%

JOHCM UK Opportunities Fund Acc 1.39%

JPM Natural Resources A Acc 1.14%

JPM New Europe A Acc 0.45%

Jupiter Ecology Fund 0.40%

Jupiter Financial Opportunities Fund 1.81%

Jupiter India Fund 1.09%

Jupiter International Financials Fnd Acc 0.51%

Jupiter Merlin Growth Portfolio Acc 0.78%

Jupiter UK Special Situations Fund 0.50%

Legal & General Dynamic Bond Trust R Acc 1.38%

Legal & General Dynamic Bond Trust R Inc 0.25%

Legal & General UK Alpha Trust R Acc 0.25%

M&G Emerging Markets Bond Fund A Acc 0.27%

M&G Global Basics Fund A Acc 4.10%

M&G Global Growth Fund A Acc 0.26%

M&G Optimal Income Fund A Acc 1.63%

M&G Recovery Fund A Acc 3.56%

M&G Strategic Corporate Bond Fund A Acc 1.09%

M&G Strategic Corporate Bond Fund A Inc 0.26%

Martin Currie North American Fund 0.56%

Neptune Balanced Acc 0.51%

Neptune China Fund 0.80%

Neptune India Fund 1.11%

Neptune Russia & Greater Russia Fund 1.52%

Neptune US Opportunities 1.05%

Newton Global Higher Income Fund 2.34%

Newton Real Return Fund Inc A Shares 0.79%

Old Mutual Glbal Strategic Bond OEIC Acc 1.86%

Old Mutual UK Select Mid Cap OEIC Acc 0.89%

Rensburg UK Mid-Cap Growth 0.25%

Schroder Corporate Bond Acc 0.29%

Schroder Monthly High Income Acc 0.52%

Schroder Monthly High Income Inc 0.50%

Scottish Widows Latin American Fund 1.72%

Standard Life Inv Higher Income Acc 0.53%

Templeton Global Total Return Bond Acc 0.54%

Threadneedle Emerging Market Bond Fund 0.27%

Threadneedle European Smaller Companies 0.51%

Threadneedle High Yield Bond Fund 0.26%

Threadneedle Latin America Fund 1.20%

Close

,

S.M. - Diversity lower risk but why on earth do you need to invest in over 90 funds when many have similar themes. Certainly the small amounts (eg 0.26% = £260 from the 100K fund) presents a problem for many of the funds in terms of minimum contribution.

If you use a broker you can buy virtually all UT/ OEIC funds, that is to say not IT's, with zero initial charge ( you would pay stamp duty, initial brokerage charge with some ITs, bid-offer spread with ITs), and if you are crafty after buying the funds switch broker at the end of tax year to the one that refunds trail comission direct to you saving you 0.5 % on the usual OEIC/UT annual charge of 1.6 % average - bringing the average OEIC/UT TER more in to line with ITs. With the above in mind and the added volatility of gearing and performance dependent premium/ discount to NAV of ITs and i really dont see the point of investing in most ITs - OEICs / UT s are cheaper. The old addage of low TER no longer applies in my opinion given the above. I am a private investor not advisor.

Do your homework and use the internet - its all out there!

Some ITs have very impressive unbroken track records of paying rising dividends for decades and are well worth considering (see City of London IT and others or go to aitc.co.uk to search for income ITs). ITs in often perform better than the equivalent UTs over the long term - possibly due to lower charges. There is also the chance of buying stock at a discount in "bad times" which you can't with a UT. Why buy a UT offering a £1 for a £1, when you could buy the same stock at a 5% or more discount because the market has temporarily taken fright? It's a no brainer. Or,with 100k you could invest in a mixed group of ITs and High Yielding shares directly and avoid managers fees completely. But if you need income UTs, a good source of information is the White List published online by Principal Investment Management (just Google it). This monitors what it considers to be the most the income UT most worthwhile investing in, and updates regularly every six months.

I'm sorry to say that Citywire has a long standing bias in favour of UTs, and at times has all the appearance of an advert for them alone. ITs will never get much publicity because advisers make little or nothing from them, not because they are no good.

Arborbridge.

Satish Mittal,do you really need such a huge range of funds? Having said that you have many outstanding holdings,which should produce a good return ,in due course.

Just buy Merchants Trust at below 350. Yields 6% plus, is at a discount and has an unbroken record of dividends and increases over very many years.

It is geared at about 125% but the loan related to gearing about 5 years out.

It also buys options to protect capital.

ITs are complicated by the discount / premium spread. Sometimes they are a poor choice, especially if held at the end of a bull run when prices can fall off a cliff! I sold out in 2007-2008, except for some Zeros.

Mike 1

The discount/premium may be a complication, but it's not that difficult to get your head round. Assuming we are looking at the "old stagers" like Merchants, City of London, which aren't likely to go bust, just buy when the discount is high. If you want the income, why sell? Just keep collecting the divis for ever. Selling out when the discounts are wide is a huge mistake.

Arb.

Why do you suggest M&G Strategic Corporate Bond? - despite its name it is a sterling corporate bond. M&G's strategic bond offering is Optimal Income which has a better track record and much greater flexibility for these uncertain times.

What about ETF's? Cheap to trade - I don't know a lot about them but would be interested in comments as they might be better than IT's .

For the best discounts on annual charges try Alliance Trust Savings. Hargreaves Lansdown, although an excellent company with service second to none, have very poor "loyalty bonuses" in comparison. The problem is that Alliance Trust does not have such a comprehensive platform as HL but it is expanding all the time. Some time ago I bought some M & G Global Dividend through HL as Alliance Trust at that time didn't offer it. I now find that HL only gives a loyalty bonus of .1% on this compared with Alliance's .6%. It is the same with all funds and most have no initial charges as well. Although I am a fan of Investment Trusts it does bring the charges of Unit Trusts down to much nearer ITs.

We have been collecting our Peps & ISAS pretty well since their inception and have built total holdings north of £ 350k.

They have now been given to Hargreaves L. to "manage" and pay out the dividends,as "tax free" income to supplement our pensions.

When we worked we re-invested our dividends and built value.

75% are in Investment Trusts (Personal Assets, RIT, Perpetual Income, The balance is spread between Invesco Strategic Bond Fund and a handfull of Income Funds, Artemis, and Perpetual High Income, Newton .

I have in the main just left them alone in good and bad times . We show very adequate capital growth and enjoy the income !

This is a simplified account of our long term strategy, which has been sucessfull, and would,over time still suceed going forward.

I prefer a forum name

Thank you for the comments on ITs - I should perhaps have said `as well as` not instead of UTs. I prefer ITs because the Annual Reports appear to be more transparent than UT reports, and hopefully the Boards are independent. There are potential snags - eg the discount. My main problem as an ordinary saver is appropriate asset allocation, (see Richard Squire above).

Returning to the subject of tax, two funds mentioned if held in an ISA have divs paid gross. Can the Citywire team tell us which Investment Trusts also qualify to pay divs gross, if any. Knowing this, & looking for buying opportunities when the discount to NAV is hign could be a good long term strategy.

I have receantly changed some of my investments in my sip to IT`s I intend having a mixture of both so that I can compare their performance.

Investment trusts are complicated beasts where you place your faith in the integrity of the managers .

I invested my entire £7000 I S A in ABERDEEN Worldwide High Income Trust ,much hyped in the quality weekend press in 2001,promising a return of 9% tax free, as I was coming close to retirement.

The premise of all the full page advertisements was that it would be a better investment than leaving it in a Building Society High Interest Account where the capital would stay the same.

I lost the whole lot within two years.

The wonder is that ABERDEEN TRUST MANAGEMENT got away SCOTFREE with the scam.

I began investing in UTs in my mid 30s,, and added some individual equities over the years, retiring in 1993 with a £100000 pot plus a few moderate private pensions. I never earned more than the average wage, so I began saving for pension at 25, to build it up over the years. Now at 76, We have a financially problem free life, able to ignore the ups and downs of the market. I found investing in ITs fraught with danger and lost money with several of them...I found that UTs and OIECs have been more reliable a choice apart from 1 or 2 bad desicions!! I found City of London and Merchants to be the best ITs long term, and am now still holding a few growth UTs eg jupiter emerging european, and their european special situations funds,plus neptunes global alpha, and Alliance BRIC. the rest is in corp bond, strat. bond, and equity income funds from Artemis,jupiter, Neptune, Invesco, and Rathbone. You cant a void mistakes when investing, just make as few as possible!!

Hello Richard

Does it make any difference to invest in income units or Acc units if, of course available. I do not need income but may do so in 2 years, should I hold in Income or acc units. At present some are in Income while others in Acc. Should I not keep all in one type to make life easy.

Also, last saturday's FT said 'Stay clear from fixed income bonds, instesd buy infrastructure, property and income funds.' ' limit expore to Govt debt and investment grade funds, instead favour strategic bonds fund which invests in high yd bonds as well. ' Gilt investers should take profit or sit tight. What is your view? and does it effect the bonds that you recommend. I choose your funds to invest unless I find their perfornance/ drawdown worrying. Therefore your comments, advice is most welcome.

Satish Mittal

Does it make any difference to invest in income units or Acc units if, of course available. I do not need income but may do so in 2 years, should I hold in Income or acc units. At present some are in Income while others in Acc. Should I not keep all in one type to make life easy.

Also, last saturday's FT said 'Stay clear from fixed income bonds, instesd buy infrastructure, property and income funds.' ' limit expore to Govt debt and investment grade funds, instead favour strategic bonds fund which invests in high yd bonds as well. ' Gilt investers should take profit or sit tight.

Satish

As far as the investments themselves are concerned, you're right - it makes no difference whether you hold INC or ACC units, it just affects whether the income is paid out or reinvested.

Transferring from one to the other may not be totally straightforward however - if you have to sell INC units to buy ACC units you will lose money on the bid/offer spread and may have a tax liability. Sometimes you can switch from one to the other without it being treated as a transaction - phone your platform provider to get the definitive answer.

As for the question on gilts and corporate bonds... forecasting is always a mug's game. Bonds - especially gilts - are sensitive to interest rates (when rates rise, the value of gilts falls), and interest rates can only go one way. But on the other hand, everyone already knows that so it's 'in the price', and there's no saying when rates will rise (we could even have more quantitative easing for all we know).

Given all that uncertainty, a strategic bond fund with a good track record may well be a very good option - a manager like Richard Woolnough has his ear much closer to the ground than the rest of us, and will be able to move money between sectors as the environment changes.

Another good option is the Old Mutual Global Strategic Bond fund run by Stewart Cowley, which our senior investment analyst has just done a review of (http://www.citywire.co.uk/money/fund-of-the-week-old-mutual-global-strategic-bond/a428545). Of course you know that already though - I see it's in your portfolio!