12 funds to generate £10,000 of income in 2024

A year ago, I selected a diversified dozen funds with the aim of achieving £10,000 of annual income in 2023.

Collectively the hypothetical portfolio yielded 4.55%, meaning that a sum of £225,000 was required to attempt to hit the target.

While income is the priority, I also wanted to strike the right balance from a total return perspective.

The income target was achieved, with £10,139 of income generated. Overall, when combining both capital and income returns the portfolio increased to £240,497, which works out as a percentage total return of 6.9%.

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Before revealing the line-up for the £10,000 income challenge in 2024, let’s look at how the constituents fared.

How the 12 income fund choices fared in 2023

Just two of the dozen funds made negative returns over the year. They were FTF ClearBridge Global Infrastructure and VT Gravis Clean Energy Income, losing -2.6% and -13.6%.

For FTF Clearbridge Global Infrastructure, the wider infrastructure sector has been negatively impacted by higher interest rates. Those rate rises, which in the UK started at the end of 2021, increased the returns of “safer” assets – cash and bonds, including gilts. With higher income on offer for those lower-risk areas, investors moved to take advantage, reducing exposure to income alternatives such as infrastructure that are higher up the risk spectrum.  

For VT Gravis Clean Energy Income, its double-digit loss in 2023 is also reflective of the clean energy sector having a year to forget. Again, higher interest rates proved a headwind, leading investors to lower-risk areas for income. The fund offers exposure to companies that have significant involvement in the clean energy sector such as wind, solar and hydro. One of the fund's main area of focuses is having exposure to investment trusts.   

In the UK equity income sector, the three active funds chosen in 2023 all returned more than the sector average return of 7%. Top of the pile, with a return of 13.2%, was Janus Henderson UK Responsible Income, which benefited from exposure to financial services and consumer cyclical stocks.

In second place was Man GLG Income, up 12.1%. The fund undertakes a value-driven approach to provide a yield well in excess of the FTSE-All Share. In 2023, performance was helped by exposure to consumer cyclical stocks, with housebuilders Bellway (LSE:BWY) and Barratt (LSE:BDEV) among the key performance contributors.

And in third place was Artemis Income, returning 9.8%. This fund mainly sticks to dependable, dividend-paying FTSE 100 companies. Performance in 2023 was boosted by its position in 3i Group (LSE:III), the private equity investment trust that benefited from a notable valuation uplift for its biggest private equity holding, Action, the Dutch non-food discount retailer. At the end of December 2023, 3i Group was the top holding in Artemis Income, accounting for 5.8%.

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The passively managed Vanguard FTSE UK Equity Income Index returned 6.2%. The fund physically invests in the constituents of the FTSE UK Equity Income index, which consists of shares “that are expected to pay dividends that generally are higher than average”. 

The global equity funds delivered steady, albeit not spectacular, returns. Fidelity Global Dividend retuned 9.5%, while Morgan Stanley Global Brands Equity Income gained 6.4%. The average global equity income fund was up 9.2%.

Guinness Asian Equity Income was up 6.3%, ahead of the flat return for the Asia-Pacific excluding Japan sector. Its equally weighted approach of 36 stocks helps to reduce stock-specific risk. In 2023, performance was driven by its exposure to information technology, with a number of its holdings benefiting from excitement around the potential of artificial intelligence (AI).

The multi-asset choice – Artemis Monthly Distribution – delivered 7%, arguably showing that predictions of the death of the 60/40 portfolio have been greatly exaggerated.

Bonds, in the end, had a solid year. However, it was not until the final two months of the year that bond prices rallied amid expectations that interest rates would be cut in 2024. As at the start of November, Jupiter Strategic Bond was in the red for 2023, down around 3%, before rising strongly due to end the year up 8.9%. Royal London Global Bond Opportunities was up 4% for the year at the start of November before a final flurry to end the year up 9.8%.

Bond fund returns come from two sources: price changes and interest earned. Due to higher yields on offer from bonds in response to interest rate rises, fund managers can generate more income, which has been the other key part of the equation driving total returns.

In 2023, the bond fund duo was ahead of the sector average returns of 4.7% and 7.8% for the global mixed bond and strategic bond sectors.

Source: Morningstar. Total return figures are one year to 31 December 2022. 12-month yield as at 31 December, used to estimate income from initial value. Past performance is not a guide to future performance.

Purpose of the portfolio 

The hypothetical portfolio is created to show how DIY investors can build their own diversified income portfolios. The funds are chosen on the basis that over the medium to long term they would be expected to grow both capital and income. However, there are no guarantees that will be achieved. Moreover, you must be mindful of the fact that overall total returns (capital and income combined) can decline, especially in the short term.

Bear in mind that funds have to distribute all the income generated by the fund. Therefore, when income dries up, as it did in 2020 when the Covid-19 pandemic emerged, a dividend cut is pretty much inevitable for funds.

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Investment trusts, on the other hand, can hold back up to 15% of dividends received each year, which means they can build up a reserve to bolster payouts in leaner years.

Two in, two out: how the 2024 line-up has changed

As the funds chosen are selected for the medium to long term, I intend to make changes only when necessary, or if I spot a potential new opportunity to generate sustainable income or diversify further.

With that in mind, there are only two exits and two new entrants for 2024. Overall, the portfolio yields just over 4.5%, meaning £230,000 is required to attempt the £10,000 income challenge in 2024.

When investing in funds, the key things to watch out for include; whether the same fund manager is running the fund, whether the manager is sticking to his or her knitting in terms of the investment objective and investment style, and whether performance has soured on the back of too many poor stock selection decisions.

I also want to ensure that all or most of the funds chosen appear in either interactive investor’s Super 60 or ACE 40 lists of investment ideas. Those lists are made up of funds endorsed by interactive investor, with the day care of the list handled by Morningstar’s Manager Selection Services Group.

The removal this month of Morgan Stanley Global Brands from the Super 60 list has led me to also call it a day with this fund. The reasons for its exit from the Super 60 are on the grounds of its derivative overlay, which artificially boosts income in exchange for some upside on capital growth. This strategy is seen as being less effective in a higher-yield environment.

Finding a replacement global equity income active fund was problematic, as I wanted to ensure that the fund had a decent dividend yield due to my decision to retain Fidelity Global Dividend, which is the lowest-yielding fund in the portfolio at 2.5%. Figures from Trustnet show the median yield for the Investment Association’s global equity income sector is 2.6%.

This led me down the passive route to select the Vanguard FTSE All World High Dividend Yield ETF, which has a yield of 3.5%. The fund tracks the FTSE All-World High Yield Index, which comprises around 1,850 large and mid-cap stocks with higher-than-average dividend yields. The yearly charges are reasonable, at 0.29% a year.

I mulled dropping Fidelity Global Dividend, purely on the basis of its low yield, in order to boost the overall yield of the hypothetical portfolio. I considered opting for a higher-yield fund in another region or investing the allocation across the rest of the portfolio. In turn, this would result in targeting £10,000 of income with a lower capital sum. However, I believe it is more beneficial in the long run to take a balanced approach rather than reach for yield.

Therefore, Fidelity Global Dividend retains its place to provide a greater balance of returns, as the fund aims to generate both income and growth, while limiting downside risks.  

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The other change I am making to the 2024 line-up is to introduce Royal London Short Term Money Market fund. Its addition is to take advantage of higher interest rates, which have boosted the yield of this fund and other money market strategies.

While the reality is that every investment carries an element of risk, at the most cautious end of the risk spectrum are money market funds. These funds own a diversified basket of very low-risk bonds that are due to mature soon, normally in under a year. As a result, investors can earn an income on their cash with minimal risk.

When interest rates rise, the income generated by money market funds increases, causing fund yields to rise. Therefore, bear in mind that if and when interest rates are cut, the yield on money market funds will fall. However, even if interest rates are cut in 2024, any reductions will be small and gradual.

Moreover, there’s very little chance of rates going back to 0.5% or lower. For me, it makes sense to take advantage of a low-risk fund yielding 5.3%.

To make room, I have cut VT Gravis Clean Energy Income, the weakest performer in 2023. Our ii analysts remain fans of the strategy, and it is a member of the ACE 40 list, but for the purposes of this portfolio I feel the money market fund provides a lower-risk way to achieve a decent yield that is not far off the 5.8% being offered by VT Gravis Clean Energy Income. The yield gap between the two is not big enough for me to take on more risk.

Sources: interactive investor and Morningstar. Yield date for all funds sourced on 24 January 2024. 

The composition of the portfolio

Last year, 30% of the portfolio was allocated to the UK, a weighting I am sticking with. Vanguard FTSE Equity Income and Janus Henderson UK Responsible Income are handed 10% , while Artemis Income and Man GLG Income are 5% weightings.

A quarter of the portfolio remains in global/overseas income, with Vanguard FTSE All World High Dividend Yield ETF and Fidelity Global Dividend allocated 10%. Guinness Asian Equity Income is more of an adventurous strategy due to the area it invests in, and is allocated 5%.

Artemis Monthly Distribution, a mixed-asset fund, that typically has 60% in shares and 40% in bonds, is handed 15%. The fund pays a monthly income, which is attractive for those looking for a regular income stream.     

Dedicated bond fund exposure has been increased for 2024, from 20% to 25%, due to the addition of Royal London Short Term Money Market. The outlook for bonds looks more positive, given the interest rate cycle has likely peaked. Flexible bond funds Jupiter Strategic Bond and Royal London Bond Opportunities retain their 10% weightings.

And finally, 5% is allocated to FTF ClearBridge Global Infrastructure Income. The exposure to infrastructure provides additional diversification in the portfolio, which is why I am keen to retain it.