Juicy income
Ian Cowie on high-yielding bond funds
“Do you fancy more than 8% annual income from investment trusts focused on assets that are generally regarded as less risky than ordinary shares?”
Do you fancy more than 8% annual income from investment trusts focused on assets that are generally regarded as less risky than ordinary shares? Better still, some of these funds have increased their distributions by more than inflation in recent years.
Several examples of high and rising income can be found in the AIC’s Debt – Loans and Bonds sector but it is important to understand that the underlying assets are not risk-free. That’s why professional fund management, which all investment trusts provide, can prove particularly valuable.
For example, not all debts or loans are repaid – because some borrowers default – and bonds, a name for debt that can be traded on markets, can see their prices fall; possibly to zero. That’s why it is sometimes said that no bond is worth any more than the guarantor behind it.
Most bonds are issued by large companies or by countries, which seek to raise capital from investors. Bond issuers usually promise to pay a fixed amount of interest for a fixed period before repaying the face value or nominal value of the bond.
The better the perceived creditworthiness of the bond issuer, the lower the coupon or promised income payments are likely to be. However, many bonds are bought and sold by investors before their redemption date – or the end of their fixed term, when they mature – and the prices they fetch before then may be affected by several different factors.
One consideration, mentioned earlier, is the likelihood of the issuing company or country honouring its commitments to pay income distributions and repay capital on maturity. This is sometimes known as ‘specific risk’.
Another consideration is ‘market risk’ or investors’ expectation of likely inflation before each bond matures, as any reduction in the purchasing power of money will reduce the real value of bonds’ income and capital.
Fluctuating bond prices before redemption create the potential for capital gains or losses. Returns can be positive or negative, depending on whether these bonds are bought below or above ‘par’, their nominal value, and whether their market price subsequently rises or falls by the time they are sold or reach maturity.
“One reason yields are as high as they are today is that many investors fear inflation will rise in future and this expectation has reduced the real value of the fixed income they promise to pay, and thus their market price.”
One reason yields are as high as they are today is that many investors fear inflation will rise in future and this expectation has reduced the real value of the fixed income they promise to pay, and thus their market price. For buyers today, this increases their yield – or the fixed income they pay expressed as a percentage of their purchase price. This can be thought of as the ‘bond see-saw’; as prices fall, yields rise; and vice versa.
More positively, bonds do confer valuable promises which are absent from ordinary shares; where neither the capital value nor income distributions are fixed and either or both can fall without warning; possibly to zero. Bonds’ legal obligation to pay income and capital is the reason they rank ahead of shares when companies or countries distribute assets to investors, either as going concerns or in insolvency.
As you might expect, even very big businesses are not usually regarded as being more creditworthy than the British government, whose bonds are known as government gilt-edged stock or gilts. That’s why corporate bonds tend to offer higher yields than gilts.
Never mind the generalities, what about some specifics? CVC Income & Growth (stock market ticker: CVCG) is an investment trust with total assets of £300m that is currently yielding 8.4%. This fund has increased shareholders’ income by an annual average of nearly 16%, according to independent statisticians Morningstar, and currently leads the AIC Debt – Loans and Bonds sector over the last five and ten-year periods with total returns of 64% and 115% respectively.
However, it is important to be aware that CVCG did so by focusing on “sub-investment grade European corporate debt instruments”. In other words, it bought bonds issued by businesses that were regarded as higher risk in order to achieve those higher returns.
Similarly, CQS New City High Yield (NCYF), with total assets of £367m, is currently the highest yielder in its sector, offering income of nearly 9%. This was achieved by buying bonds issued by – among others – the Stonegate Pub Company and the car manufacturer Aston Martin, but NCYF only increased distributions by a modest annual average of 0.2% over the last five years.
“…investors for whom capital preservation is the priority may prefer to accept lower income from funds holding gilts, including index-linked gilts for protection against inflation.”
Alternatively, investors for whom capital preservation is the priority may prefer to accept lower income from funds holding gilts, including index-linked gilts for protection against inflation. Investment trusts holding such low-risk assets include Capital Gearing Trust (CGT) and Ruffer Investment Company (RICA), both currently yielding about 2%, and Personal Assets Trust, which is yielding 1%.
As with other assets, higher returns tend to entail higher risks and vice versa. But bond-based investment trusts can deliver high and rising income with professional fund management to diminish risk by diversification, reducing shareholders’ exposure to setbacks or failure in any company or country.
Data correct at 03/06/26.
Investment Trust
Discount/ premium (%)
Share price total return (%) 1yr
Share price total return (%) 5yr
Share price total return (%) 10yr
Dividend yield (%)
Debt - Loans & Bonds sector average
1.96
7.13
40.42
102.9
8.1
CQS New City High Yield Fund
5.47
8.93
43.01
99.77
8.95
CVC Income & Growth
0.04
5.83
63.98
114.91
8.43
-0.24
3.5
47.23
91.91
6.84
Invesco Bond Income Plus
1.29
8.25
26.22
74.77
7.12
M&G Credit Income
-0.15
0.53
28.42
N/A
8.37
TwentyFour Select Monthly Income
2.28
8.41
34.36
108.32
8.56
