High yielding funds for expensive times

Which five strategies are offering more than 6%?

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There is no denying that we live in expensive times, with CPI inflation above 9%, energy bills more than doubling compared with 2021, and workers in numerous essential services striking for better pay amid increased living costs. Anyone with a fixed-rate mortgage deal expiring in the coming months can expect to see rates approaching 6%, more than twice what they typically were a year ago. And while higher interest rates are better news for savers, typical deposit rates remain below 4% even in accounts where withdrawals are restricted.

With this in mind – and with house prices widely forecast to fall, and bond and property funds having taken a hammering in recent months in anticipation of worse economic times ahead – income-seeking investors may need to cast their net wider in order to secure a decent yield on their assets.

Below we have selected five funds (four closed-ended and one open-ended) currently offering a yield above 6%. While many more such funds exist, we have sought to exclude those where falling capital values over the past 12 months have inflated the yield (which is a backward-looking measure); this has effectively ruled out most bond, property and infrastructure funds.

FundPrice performance 1 yearPrice performance 5 yearsDiscountYield
Amedeo Air Four Plus52%-40.9%-65.4%13.0%
Henderson Far East Income5.2%4.3%3.5%8.4%
Baillie Gifford EM Bond0.6%-3.8%N/A8.4%
Abrdn Latin American Income21.6%-3.0%-11.3%6.6%
Abrdn Equity Income5.6%-2.5%-1.1%6.4%

Although by no means exhaustive or even particularly scientific, the short list does cover a range of asset classes, geographies, risk profiles and investment approaches.

The two equity funds on the list – both closed-end funds – are Henderson Far East Income (HFEL) and Abrdn Equity Income (AEI).

HFEL has been managed for many years by Mike Kerley and Sat Duhra at Janus Henderson Investors. It is a long-term high yielder, rarely dipping below a 6% yield and currently offering 8.4%. The trust invests across the Asia Pacific region (generally excluding Japan), and holds a mixture of stocks with high current yields and those where a high level of dividend growth is expected; this gives it access to both ‘growth’ and ‘value’ stocks, although it will not generally invest in non-yielders. Its dividend is usually fully covered by income, although income may come (to a modest extent) from premiums on option writing as well as from portfolio company dividends. While capital returns have tended to be more modest than those of its peers, it has consistently generated the highest dividend yield in its AIC Asia Pacific Income sector, and tends to trade at a small premium to NAV (currently 3.5%), regularly issuing new shares to meet investor demand.

AEI is a UK equity income fund, managed by Thomas Moore and Iain Pyle. While many of its peers focus on the big, defensive mega-caps, AEI takes a multi-cap approach, with only around half its assets currently invested in the FTSE 100. Its largest sector weighting is currently in financials, where names such as wealth manager Close Brothers and spread betting firm CMC sit alongside the high-street banks. With a dividend yield of 6.4%, it is the lowest yielder on our current list, although well above its sector average of 4.0%, and trades at a very narrow discount of 1.1%.

Also in the Abrdn stable, although a world away from the familiarity of the UK equity market, is Abrdn Latin American Income Fund (ALAI), a hybrid equity/debt fund with a current yield of 6.6%. Like most Latin American funds, ALAI had struggled for a number of years as the region’s equity markets remained depressed, but has bounced back in the past 12-18 months as market conditions have favoured natural resources producers. While the recent post-election turmoil in Brazil – both the largest equity market in Latin America and also the largest weighting in the ALAI portfolio, at nearly 50% – may cloud the immediate outlook, the trust’s ability to hold bonds (typically around 40%) as well as equities could help to limit potential volatility. The current discount to NAV of 11.3% is wider than the circa 17% seen at the last year-end (31 August 2022) but broadly similar to end-FY21, despite improved investment performance.

Remaining with both emerging markets and debt, the sole open-ended fund on the list is Baillie Gifford Emerging Markets Bond, one of a number of high-yielding emerging market debt (EMD) funds, but the only one with a (marginally) positive 12-month return. The fund is managed by Sally Greig and Yannis Lykouris and invests in local currency rather than US dollar denominated EM government debt. Its current yield of 8.4% is generated by a portfolio in which the five largest current geographical exposures are to Brazil, South Africa, Mexico, Indonesia and Peru, making up almost half of the total.

Finally, an outlier – both in terms of its chunky 13.0% yield and its non-traditional asset class – is Amedeo Air Four Plus (AA4) , an aircraft leasing closed-end fund that was one of a number hammered by Covid restrictions on air travel, as its lessees mothballed their fleets. Its share price is up by more than 50% over 12 months, yet it remains on a discount to NAV of 40.9%, in contrast to its peers in the sector, most of which are at a substantial premium. While arguably still a risky and somewhat opaque line of business, fund of funds manager Nick Greenwood (MIGO Opportunities Fund) continues to back AA4, which he says could benefit from a longer-than-expected fleet life given ongoing delays in the manufacture of new wide-bodied jets.

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