Annual total returns from commercial property have exceeded 18 per cent in the last three years. Over £4bn flowed into property funds in this Isa season and this liquidity rather than good value keeps the market buoyant. Yields have fallen and in many cases are below the cost of borrowing. West End offices yield 3.5 per cent but rental growth may be supported by good corporate profits and favourable supply and demand. It is the retail sector, yielding only 4 per cent, where capital growth prospects are most at risk.
Iimia took the view a couple of years ago that bonds were relatively unattractive. During 2006, the average UK corporate bond fund produced a negative total return of 0.2 per cent as bond yields rose and credit spreads had already tightened to a point where further capital growth was limited. Bonds, now yielding above 5 per cent for the first time since September 2005, offer improving value but rising inflation and interest rates could mean a better entry point is possible.
The ability to get a relatively high dividend yield and gain exposure to growth opportunities are not mutually exclusive. Fundamentals are in place for sustainable and growing income from regions as diverse as continental Europe and Asia, together with attractive growth prospects. Schroders points out in the literature for its new global income fund that 91.8 per cent of firms yielding more than 3 per cent are outside the UK. Dividend growth in Europe, Asia and Japan is higher than the UK.
The rapid expansion of China and India regularly hits the headlines for the growth potential but it is not commonly known that one can invest in this theme and get a decent yield. Funds like Invesco Asia infrastructure, City natural resources, Utilico emerging utilities and Merrill Lynch commodities income have relatively attractive yields and are well placed to benefit from a powerful long-term growth story. By 2020, China is set to build 400 cities the size of Bristol, lay 25,000km of expressways, expand the rail network by 15,000km, add 44 airports and construct 200 ports. The combination of income and exciting growth prospects is compelling.
When investing for income, it pays to look beyond UK equity income, commercial property and corporate bond funds. An imaginative global approach is likely to pay dividends.
Daniel Lockyer manages the Iimia income fund and is co-manager of the Iimia accelerated fund and Iimia investment trust.