Investment companies and the demand for income

The story has become so predictable that newspapers barely bother reporting it these days: each month, the Bank of England’s Monetary Policy Committee meets to discuss interest rate policy, and each month it leaves the cost of borrowing untouched. Rates have now been held at 0.5% since March 2009. The latest guess is that they will finally start rising next year, but don’t hold your breath.

For income seekers, this has been a thoroughly miserable period – cash accounts have largely failed to hold their value in real terms, so little interest do they pay, while the low interest rate environment has also held back yields on other types of asset.

Investment companies save the day

All is not lost, however. Oriel Securities, the investment trust analyst, says there are now 20 investment companies of decent scale that offer yields of 4% a year or more. That’s a 25% increase on May, when it last surveyed the closed-end fund sector for the top income payers.

For investors prepared to accept the risk of exposure to equities, the investment company sector now offers a great deal of choice. The high yielders are spread across a broad range of sectors.

In the UK, for example, both Merchants and Shires Income now offer a yield of 5.1%, Oriel points out. Dunedin Income Growth pays 4.3% while Murray Income and City of London pay 4.1% and 4% respectively.

For investors happy with exposure to international equities, the options are more numerous. More generalist funds include the likes of European Assets, on a yield of 6.6%, and British Assets, yielding 4.9%. Specialist options include Henderson Far East Income, currently yielding 5.6% a year and JPMorgan Russian, which offers 4%.

Other options include commodity funds such as BlackRock Commodities Income, which yields 6.1%, and BlackRock World Mining, on a yield of 5.9%.

Moreover, Oriel’s analysis only includes funds investing in equities. High-yielding investment companies are also to be found in sectors including property, infrastructure, renewable energy and debt – all of which are worth considering for income seekers.

A natural home for income

Closed-ended funds aren’t the only vehicles capable of generating yield, of course. But the investment company sector does have some important advantages that investors should bear in mind when looking for income.

Unlike other funds, they have the power to retain some income in good years in order to finance pay-outs in less productive times – this enables them to pay consistent dividends that income seekers can rely on.

Also, in certain circumstances, investment company boards may elect to pay income out of capital – while this can erode the long-term capital returns generated by the funds, many investors are happy to prioritise short-term income payments.

All in all, the investment company sector is worth considering by investors who need to maximise income – providing they are comfortable with the risks.