Diversified income streams are particularly attractive during periods of heightened market volatility, as they provide a degree of stability. Spreading your capital across equities, bonds and other revenue-generating investments can reduce risk and maintain a reliable cash flow.
But how can you build such a portfolio? Which income-generating areas should be included and what is the ideal asset allocation?
Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.
What type of income investor are you?
Your financial goals will dictate the portfolio’s construction. That’s why you must be very clear on what you’re trying to achieve. How much income do you want to generate? Are you planning to withdraw sums regularly, or can you reinvest dividends? What other assets do you already own?
Next, you need clarity on your risk appetite. For example, if you’re retired and want a pension boost, then a higher allocation to fixed income makes sense. Conversely, if you need a higher income – and are happy to endure the volatility that goes hand in hand – then emerging market bond funds may be more suitable. Generally, those with short investment horizons should stick to safer assets, while medium and longer-term investors can consider more adventurous splits.
Which asset classes provide income?
There are plenty of income-producing asset classes. These can include government bonds, corporate bonds, dividend-paying equities and real estate. Equity income funds and high yield bond funds better suit balanced or adventurous investors, while regional funds are usually more volatile than globally-focused portfolios. Corporate bonds and real estate, meanwhile, can suit all three types of investor, depending on the individual fund’s approach to credit and duration. It’s possible – and often advisable – to further diversify exposure within each, by factors such as geography, company size and the yield on offer.
While investors can construct their own portfolios by buying individual bonds and equities (shares), many prefer to opt for an investment fund. This route automatically provides diversification, as well as the comfort of having a professional fund management team at the helm to make the various investment decisions.
Ten funds adding income to your portfolio
Fixed income is a natural place to start when adding income. The Jupiter Monthly Income Bond fund is a solid option, with a current yield of 6.3%*. It has a relatively short duration, meaning it’s less exposed to interest rate movements. Managed by the experienced Hilary Blandy, the combination of monthly income payments and an attractive yield makes it a compelling choice for income seekers.
Another strong contender is Man High Yield Opportunities. This is an unconstrained, concentrated global high yield bond fund, largely driven by individual bond selection, with a current yield of 6.8%*. Manager Mike Scott has an excellent track record of navigating the additional risks in this sector while achieving above-average returns. The concentrated portfolio offers a differentiated but appealing return profile compared with its peers.
Our final pick is the M&G Emerging Markets Bond fund. With a yield of 7.2%*, the manager has the flexibility to invest across the full fixed income spectrum in emerging markets. This includes both government and corporate bonds, denominated in local currencies or in US dollars (‘hard’ currency).
Three equity income options
The JPM Global Equity Income fund is a core equity income holding with a global remit, including emerging markets. The experienced management trio is supported by a large analyst team at JPMorgan. They take a pragmatic approach, balancing ‘compounders’, higher-yielding stocks, and growth opportunities within the portfolio.
We also have a number of regional equity income funds on the Chelsea Selection. One to consider is the Janus Henderson UK Responsible Income fund, which follows a well-defined approach to investing responsibly with a bias towards mid-caps. Manager Andrew Jones brings extensive experience in equity income and applies a common-sense approach. He avoids chasing yield, instead seeking a balance between growth and attractive income.
Elsewhere, we also like Schroder Asian Income. This fund will invest in the Asia Pacific region, including Australia and New Zealand, but excluding Japan. Manager Richard Sennitt has a flexible mandate and aims to maintain a well-diversified portfolio of income streams to generate a 3.5% to 4% yield. This is potentially a core holding for those looking for Asian income.
Three alternatives
Our final trio of funds explores alternative ways to generate income, including infrastructure and absolute return strategies.
First, we consider infrastructure. The TM Gravis UK Infrastructure Income fund mainly invests in investment trusts, with exposure to assets ranging from railways to solar power. It targets an income of 5% per annum, distributed quarterly, and offers access to a relatively less volatile, higher-yielding segment of the UK economy.
Meanwhile, FTF ClearBridge Global Infrastructure Income has a broader geographical remit, with exposure to countries including the United States, Canada, the UK, Spain and France. The fund is designed to provide a good income with stable growth and some inflation protection. The fund targets a yield of greater than 5%.
The Janus Henderson Absolute Return fund is a UK-focused long/short equity strategy that aims to deliver positive returns over rolling 12-month periods. It tends to come into its own during falling markets. In short, we favour this fund because, unlike many of its peers, it has consistently achieved its stated objective.
A simpler solution: one fund, fully diversified income
For many investors, building and maintaining a diversified income portfolio can be time consuming and difficult. Selecting the right mix of funds and monitoring them requires ongoing expertise.
That’s where the VT Chelsea Managed Monthly Income fund comes in.
Rather than choosing and monitoring several funds yourself, this fund provides a ready-made, globally-diversified income portfolio in a single investment. The fund is designed to deliver a high level of income, paid monthly.
