Income investing Holy Grail – 4 funds that have delivered impressive income and capital growth

•    Top fund has delivered £8,905 of income on a £10,000 investment over 10 years
•    Best total return has turned £10,000 into £41,000 over 10 years
•    Four funds appear in the top ten for income, capital growth and total return – all have delivered total returns higher than 200%

Notes: Income figure based on £10,000 invested. Source: AJ Bell

Separate top ten tables for income, capital return and total return, as well as the methodology of the research, are provided at the end of this release.

Laura Suter, personal finance analyst at investment platform AJ Bell, comments:

“Income investors, particularly those in retirement, want the holy grail of a steady income stream but not at the expense of capital growth. The data shows the value of moving away from some of the big income names in order to achieve this. 

“Unicorn UK Income, a fund not known to many investors, has delivered almost 90% of your original investment back in income alone over 10 years. On top of that, if you’d taken that income your original £10,000 investment would have grown to £28,000.

“MI Chelverton UK Equity Income is another fund that has delivered stellar income as well as capital growth. It has handed investors almost £8,400 of income over the past 10 years and turned the original £10,000 investment into £23,200. For those that bought the ‘accumulation’ units of the fund and reinvested the income, their original investment would have turned into £41,000.

“Some funds are a choice between income and capital growth – so are top for income but have delivered much more muted price returns. Schroder Income Maximiser, for example, has handed investors almost £7,850 of income over the past 10 years, based on £10,000 invested, but has only grown the original capital to £12,034 in that time. 

“This fund sits within a group of funds called ‘income maximiser’ or ‘income booster’, which prioritise income over capital growth. These funds generate some income by using ‘derivatives’, which sell some of the potential future growth of the fund’s holdings in exchange for a fee that is used towards the fund’s income. It means when markets rise the fund will likely not increase as much as its peers. This approach works for investors who want maximum income in the short term and aren’t as concerned about growing their original capital. 

“There’s no clear style winner among the top income funds, although those that have managed to deliver the highest income alongside impressive capital growth have focused on smaller companies – which have soared in recent years. Unicorn, Chelverton and Montanaro all fall into this bracket. 

“However, there is a broad spread between value strategies, funds using derivatives, small-cap focused funds and those invested predominantly in large caps. The funds also range from multi-billion pound giants to much smaller funds, offering something for most investors.

“There are just 36 funds that have a 10-year track record and have more than £250m in assets – showing how hard it is for investors to find income funds that have staying power. The 10-year limit means some well-known names such as Neil Woodford or Evenlode Income are excluded for not having sufficient track record.”

Notes: The data looks at members of the UK Equity Income sector, and those that were originally in the sector but were kicked out in recent years for not meeting the yield target. Only funds above £250m and with a 10-year track record have been listed. The full list is available on request.