12 funds for the £10,000 income challenge in 2022

Three changes have been made by Helen Pridham to the income fund line-up for the next 12 months. 

Helen Pridham’s hypothetical £10,000 investment trust and fund ideas were first introduced by Money Observer several years ago. The funds chosen are made by Helen and not interactive investor. interactive investor’s Super 60 funds and ACE 40 funds are used as a starting point. 

You have two main choices when you have a capital lump sum that you need to provide you with a supplementary income or pension. You can draw the cash down gradually, or you can invest it in income-producing assets. If you draw down your capital, there is a risk that it may run out, but investing for income does not appear very easy these days either. Interest rates on deposits remain excruciatingly low, dividends on shares can fluctuate and investing in rental property is not hassle-free. Investment funds can provide a rewarding and relatively straightforward answer.

Many funds offer yields of 3% or 4%. Some have higher yields, but the risk tends to be greater. Funds pay a regular half yearly or quarterly income from the dividends or interest they earn on their assets. They spread your investment across many different companies or providers to reduce risk. They aim to pay a rising income and to maintain and grow the value of your capital and if you invest through ISAs the income and any capital growth is tax free.

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You must be prepared to take some risk because neither the income you receive from funds, nor the value of your capital is guaranteed. But by spreading your investment across a variety of funds you can reduce your risk and many funds have established track records, which shows their ability to deliver, although past performance may not be repeated.

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​​​​​​How the £10,000 fund portfolio fared in 2021

Still, the wide range of funds to choose from may be off-putting. There are hundreds of equity income, fixed income, specialist and mixed-asset income products available. However, there are various sources of research and recommendations you can tap into and to illustrate how this could be done, I put together a portfolio of funds last year with the aim of generating an annual income of £10,000.

Here, I look at how the portfolio performed during 2021, as well as reviewing and rebasing the portfolio for the coming year for new investors, replacing three holdings with others that could offer better prospects.

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As already stated, there is no guarantee that the portfolio will deliver the income expected, which is calculated on the basis of the funds’ current yields, or that the capital will be protected. Additionally, a portfolio should not be judged on one year’s performance alone – good or bad. Funds should be regarded as a medium- to long-term investment. Nevertheless, it is advisable to review your investments annually and consider switches if circumstances have changed.

Looking at last year’s portfolio, it is not surprising to find that the amount of income it generated did fall slightly short of our target. Many companies had to cut their dividends in 2020 and payments started to recover only part way though 2021. So instead of the £10,020 I had estimated, the portfolio paid out £9,599 or 4% less.  Funds can only pay out the income they receive from the companies or assets they invest in, and not all companies were able to reinstate their dividends due to the effects of the pandemic.

However, the shortfall in income was more than made up by the £30,000 capital gain which the portfolio generated as a result of the recovery in share prices last year. The portfolio rose from £262,000 to £292,763. This is a gain of 11.7%.

Therefore, income investors could have dipped into their capital for extra cash if necessary.

The 2021 portfolio: how it performed 

Sources: AIC/Morningstar/ii data as 4 January 2022 and interactive investor own calculations.

Ringing some changes for 2022

While rising share prices are welcome news for existing investors, they have the effect of pushing down yields. This means new investors in the hypothetical portfolio would need to invest more than last year to achieve the same amount of income. At the start of 2022, my calculations are that an initial investment of £280,000 is required, compared to £262,000 last year. Less capital would be needed if investors put more into the highest yielding funds, but a more balanced approach produces better results in the long run.    

At the core of the portfolio are three UK equity income funds. They make up around a third of the investment, split equally between the three funds. In the hope and expectation of the UK economy continuing to pick up speed this year and dividends to continue recovering, I have slightly increased the exposure to the UK. Two of the UK fund trio from last year have been retained. 

Royal London UK Equity Income and Man GLG Income remain, giving exposure to a wide range of UK companies of all sizes, which the managers believe offer good value and the prospect of dividend growth. The new holding is Janus Henderson UK Responsible Income (which appears in the Super 60’s ethical sister list, ACE 40).  Although the portfolio is not intended for investors who want an exclusively ethical or sustainable approach, this fund helps to give diversity by avoiding sectors such as tobacco that other income funds often hold.

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An important part of spreading your risk as an income investor nowadays is investing in overseas equity markets to gain access to sectors and industries that are not well represented in the UK, as well as exposure to economies at different stages of recovery. 

To achieve this spread, the same four holdings as last year have been kept - Fidelity Global Dividend, TB Evenlode Global Income, BlackRock Continental European Income and Guinness Asian Equity Income. The first two funds give exposure to a wide variety of markets around the world including the US, plus some additional UK coverage, while the second two help to top up in geographical areas where the prospects for further recovery in markets in 2022 are strong.

Last year was not a great year for bonds, and the outlook for 2022 is not so good either with high levels of inflation and interest rate rises set to follow. However, holding bond funds in a portfolio is important as they can help to provide stability if stock markets become volatile. Nevertheless, exposure has been slightly decreased this year, while also ensuring that the managers of the funds chosen have considerable flexibility to select the bonds they believe have the most potential to prosper.  These include two holdings from last year - Rathbone Ethical Bond and Royal London Global Bond Opportunities. They are complemented by Jupiter Strategic Bond, which looks well placed to achieve positive returns wherever possible.

For extra diversity, two specialist funds are included – an existing holding from last year FTF ClearBridge Global Infrastructure Income, plus a new holding in VT Gravis Clean Energy Income (a member of interactive investor’s ACE 40). The fund looks set to benefit from the move away from fossil fuels. The income produced by the type of assets these funds invest in also tends to be linked to inflation to give extra protection.

Portfolio switches explained

Out – Marlborough Multi Cap Income
This fund is skewed towards medium and smaller-sized businesses and produced the best capital gain in the portfolio in 2021. Existing investors may wish to continue holding Marlborough Multi Cap Income, but I wanted to make room for a more sustainable choice.

In - Janus Henderson UK Responsible Income
While it can invest in UK companies of any size, the managers of this Janus Henderson UK Responsible Income will avoid those considered to be involved in business activities or behaviours that may be environmentally and/or socially harmful. With growing interest in sustainable investing, those companies that take these factors into account will potentially prosper.

Out – Marlborough Global Bond
This fund lost ground during 2021 and it was also announced at the end of the year that Marlborough Global Bond'slong-standing manager was retiring. The switch has been made to an alternative bond fund this year.

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In – Jupiter Strategic Bond
Jupiter Strategic Bond is a ‘go anywhere,’ high-conviction fund allowing the managers, who are very experienced, to seek out the best opportunities in the fixed-interest universe on a global basis. They are also very conscious of managing risk through adjustments to their stock selections.

Out – BlackRock Natural Resources Growth and Income
This fund produced a good capital gain as well as income for the portfolio last year. BlackRock Natural Resources Growth & Income benefited from the recovery in mining stocks and the revived fortunes of oil companies. However, I have decided to switch to a more environmentally friendly fund.

In - VT Gravis Clean Energy Income
Going forward, the services provided by the type of businesses VT Gravis Clean Energy Income invests in - companies involved globally in the operation, funding, construction, generation and supply of clean energy – are likely to be in considerable demand. In addition, the managers point out that income streams generated by renewable energy assets tend to be reliable, predictable and long lasting.

12 fund picks for £10,000 income in 2022

Sources: AIC/Morningstar/ii data as 4 January 2022 and interactive investor own calculations.

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