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Funds and trusts yielding above 5%: opportunity or value trap?

Funds and trusts yielding above 5%: opportunity or value trap?

by Cherry Reynard from interactive investor | 25th February 2021 11:42

The year 2020 may have been a dismal one for income seekers, but the outlook for 2021 is brighter. There is now a wealth of funds and investment trusts showing yields of more than 5%. However, many investors saw their income slump during the crisis and are rightly cautious on whether these yields are sustainable or, perhaps, whether they come at the price of capital growth…

The fund sectors with the highest yields

The majority of these high yields are to be found among UK equity income funds and in other unfashionable markets such as Europe, Latin America or frontier markets…

James Calder, head of research at City Asset Management, says: “Where the pandemic caused the market to collapse, falling prices have meant a rising yield.”…

Many of the highest-yielding companies are high yield because they are on the wrong side of the ESG trade. Calder says: “Many of these markets are just not as ESG-friendly. They are dominated by old-fashioned dig-it-out-of-the-ground-and-burn-it industries.”…

If equity income funds offer an imperfect solution, looking more closely at the investment trust sector brings in non-equity options and Calder believes these tend to offer more secure yields. He points to trusts focused on, say, infrastructure, where yields are index-linked and asset-backed – not the case for equity income funds…

James Carthew, head of investment company research at QuotedData, sees a bright future for many of these trusts: “The warehouse REITs are supported by the underlying demand for logistics, while renewables trusts have long-term contracts, giving them predictable cash flows. There is no suggestion that any of them couldn’t pay their dividends.” ..

There are some debt funds on attractive yields though here, says Carthew, investors need to be careful…

Read more here

 

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