Just four strategies have delivered yields greater than 5% while maintaining above-average returns over the past ten years, according to a recent study conducted by Portfolio Adviser.
The UK gilt market has proven intensely volatile this year, with domestic concerns about the prospect of a more fiscally loose replacement for UK Prime Minister Keir Starmer causing gilt prices to spike in May.
The 10-year gilt peaked at 5.13%, the highest level since 1998, but has since fallen to just below 5%, which is incredibly attractive for what is meant to be a low-risk asset. But if investors are willing to brave the equity space, they can match or surpass this yield, while taking home solid total returns.
For this study, we filtered the IA UK Equity Income and IT UK Equity Income sectors for yields above 5% and above-average returns over ten years, to offer the closest comparison with the timeframe and yield of a 10-year gilt. The full list can be seen below.
See also: Gilt yields rise again as Starmer fights to stay in Downing Street and Iran crisis rolls on.
The highest yield on the shortlist is the Schroder Income Maximiser fund, which aims to deliver an average yield of around 7% per year. It currently yields around 6.85%, just barely outside the stated level.
It does this through the dividends of the underlying companies, which the team views as undervalued, and secondly through writing call options on those holdings, combining the expertise of Schroder’s Global Value and Structured Fund Management teams.
Analysts at Rayner Spencer Mills Research (RSMR) said: “This fund takes two of Schroder’s investment teams, both with deep skill sets, and combines them to form a solution for income-seeking investors looking for a high but stable level of income.”
However, the RSMR team warned the tilt towards value will lead to underperformance in growth-heavy markets. That said, the fund has more than doubled investors’ money over the past decade, surging more than 123%, a second-quartile result.
See also: Investors react as Nick Kirrage exits Schroders
Following just behind with a 6.3% yield was the Dunedin Income Growth Investment trust, managed by Aberdeen’s Ben Ritchie and Rebecca Maclean.
The trust targets rising income and capital growth from a portfolio of UK-aligned companies that match Aberdeen’s in-house sustainable and responsible investing approach.
The portfolio is currently dominated by financial stocks at 25.6% of the total allocation, with technology and industrial names also featured prominently.
This approach has worked out well for the trust over the past ten years, rising 129.5% in sterling terms compared to a sector average of around 102.8%.
However, while the ten-year return places it in the second quartile, nearer-term results have proven more challenging, sliding into the third quartile over five years, and the bottom over three.
Next is the first of two strategies from the M&G – the M&G Charifund. The fund pursues three main objectives: a greater yield than the FTSE All-Share, an increasing income stream and capital growth above inflation over ten years.
Run by Michael Stiasny and Elina Symon, the fund targets high-yielding stocks with the potential to grow their dividend over time. Within the portfolio, this is represented by a ten-percentage point overweight in financial stocks, at 39% of the total portfolio.
Meanwhile, popular sectors within the index such as consumer staples and industrials are underweighted in this fund by more than 8 percentage points each.
It currently offers investors a 5.9% yield and solid potential for capital appreciation, having outperformed the average sector peer over the past one, three, five and ten years. In fact, over the past 12 months to the end of May, it’s the sixth best-performing fund in the IA UK Equity Income sector.
Also from the M&G range is the M&G Dividend fund, another from Stiasny but this time with James Taylor as co-manager. The strategy shares some traits with its stablemate, including a focus on a dividend yield above the FTSE All Share and growing the income over time.
However, where it differs from its counterpart is that it prioritises outperforming the FTSE All-Share over any five years, rather than beating inflation over 10 years. Stiasny and Taylor aim to identify stocks that are relatively cheap compared to their growth prospects, business franchises and dividend growth prospects.
Currently, it offers investors a dividend yield of about 5.1%, which is lower than the 5.13% peak the 10-year gilt reached in May. Nevertheless, it is still marginally higher than current levels.
Once again, financial stocks represent a prominent position in the fund at a roughly 34.7% weighting, with HSBC leading the top ten at an 8.7% allocation.
See also: Titan Square Mile’s Fund Selector: Going large in IA UK Equity Income
