What is the future for income funds?

Kamal Warrich, investment analyst at Canaccord Genuity, says investors may need to revise downwards their expectations for the income they can get from a portfolio to about 3 per cent to 3.5 per cent, instead of the previous 4 per cent to 5 per cent.

He says when choosing an equity income fund, one of the first things he looks at is the size of the fund, and to what extent the 10 largest investments are responsible for most of the income payments.

He says that if a fund gets too large it is unable to invest much into small and mid-cap companies, and so cannot be properly diversified. 

Gervais Williams, who runs the Multi-Cap income fund at Premier Miton Investors, says the changing nature of the global economy is likely to mean smaller companies outperform larger ones in the years to come.

He says: “In general, most people think of larger quoted businesses as mature, with surplus cash flow paid out in dividends — small caps are supposed to be immature and investing for the future.

“At a time of recession, often it’s generalists that find it hardest to dodge the bullets. Meanwhile, some specialist markets continue to expand. So it’s possible to pick out a range of small-cap income stocks that are continuing to pay good and growing dividends — even through a recession.”

David Thorpe is special projects editor of Financial Adviser and FTAdviser