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Income funds lead the 2002 pack

Despite all the worry that 2002 may not see an Isa season, the majority of fund management groups are treating this month like any other January.

Ad spends are on the inc-rease, roadshows are in the pipeline and product launches are in abundance.

In the coming weeks, more than 10 new funds are set to hit the shelves. While these will cover a broad range of sectors and mandates, it would seem income is quickly emerging as the dominant theme to the 2002 season.

Property, bond and equity income funds are flavour of the month and for those that have chosen not to roll out new products, many have packaged together several of their existing products to create new extra-income Isa offerings.

Income is certainly a commodity this winter. With interest rates at a 40-year low, inv-estors will do well to get much more than 4 per cent gross at banks and building societies. As a result, fund management groups are racking their brains for the best ways to find alternative ways to provide attractive and safe yields.

At the top end of the scale are high-yield bond funds. With much of the junk bond market offering yields as high as 30 per cent, these have been back in the limelight in the past year. Threadneedle, Baillie Gifford and Rothschild set up high-yield funds in the second half of 2001, with Gartmore preparing for the launch of a similar higher-yield offering at the start of next month.

While the yields are attractive on these funds, the high-yield sector has not performed as well as was predicted, with many funds having suffered serious capital erosion in the past year. This is by no means a good place to look for inv-estors in need of a guaranteed and stable income.

The Gartmore monthly income fund will aim to provide a little more security than the typical high-yield fund, investing only a minority of its portfolio in sub-investment-grade bonds. It will aim to offer a gross redemption yield of 7.5 per cent.

For those in search of a little more security, Scottish Widows Investment Partnership has devised a new one-off property trust promising an initial yield of 7 per cent, which is likely to increase.

The fund will invest primarily in retail property, with the remainder in offices and industrial. Swip believes the yield on its new fund will be very secure, insisting that its 22-strong property management team will take a very active role in managing the property.

At the bottom end of the yield scale is the equity income crop. After a relatively positive year in 2001, where the best funds in the sector managed to produce a positive total return, the equity income sector is another area, which is quickly coming back into favour.

New Star Asset Management is the latest firm to enter the sector, with former Newton Higher Income star Toby Thompson set to manage its new fund.

Chairman John Duffield says: “Equity income funds have been out of favour for much of the past five years. But the economic environment at the moment means that the investment timing for these funds may now be excellent.

“Continuing economic uncertainty and high levels of volatility may well continue. If so, there is a need for a defensive element to investment portfolios. In addition, yield is likely to become more important for total return.”

During his time at Newton, Thompson proved himself to be one of the best equity inc-ome managers in the country, with his fund getting a Standard & Poor&#39s AAA research rating for five consecutive years.

Another new income offering is Jupiter&#39s distribution fund, which invests in a combination of equity income and corporate bonds. The fund will offer a net yield of 5 per cent and aims to be a low-risk, nofrills offering for investors wanting a guaranteed income.

Managed by income manager Tony Nutt and head of fixed interest John Hamilton, the fund is in experienced hands. Joint managing director Steve Glynn says the fund is being pitched as a more tax-efficient alternative to the distribution bond market.

He says: “There are not many unit trusts which can admirably take on the insurance bond market out there but I think this one does.

“I think this could be the bedrock of a portfolio for many investors because it is likely to be far less volatile than a normal equity fund but with income better than a corporate bond fund.”

While there is a broad selection of income funds coming to market this winter, all carry different risk profiles and are suited to different investors. Simpsons partner Andrew Merricks says all the new inc-ome funds are worth a look, given the poor cash returns on offer.

He says: “People are getting fed up with the cash returns they are getting. If people are really looking for income, they have got to be prepared to accept a bit of risk and look at some of these offerings.”

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