EDITORIAL: Yield trap

A spate of income funds has already been launched this year, suggesting that demand for this type of product is high and likely to remain so. Income funds can create stresses and strains for fund managers and present the risk of falling into a yield trap if you are an investor.

It is inevitable that yield is going to be the first factor that investors look at when a fund states the amount it will try to deliver, but this could create unhealthy competiton between firms trying too hard to produce the most eye-catching numbers.

Firms might use capital to supplement the yield they would ordinarily get from dividend payments within equity income funds. They might also choose underlying securities from further down the quality curve, going into unrated territory to support their attractive yield targets.

A recent survey showed that the best performers in UK equity income funds were yielding between 4% and 6%, comfortably above bank rates. But to borrow an old motoring phrase, it is now more important than ever to look under your income fund’s bonnet.

Nick Fitzpatrick is group editor at Funds Europe

©2018 funds europe

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