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Julian Gibbs

While I believe that the best UK equity funds will perform well next year because stockmarkets anticipate recovery in world economies usually by six to nine months, I also believe that the so-called junk bonds will be top performers as well as providing a very high income.

Over the past year, both sterling and European high-yield bond funds have taken a nasty dive but are now excellent value for money. It is especially true of the European high-yield funds, where UK investors should also gain as the euro becomes stronger against the pound.

Strangely enough, high-yield bond funds perform best when defaults are at their highest because most good managers have avoided the defaulting bonds or at least the majority of them. Default rates are around 10 per cent but current bond prices reflect a default rate of 50 per cent.

I believe it is likely that investors in these high-yielding bond funds will make more than 20 per cent next year, with about half coming in the form of high yields. Remember, corporate bonds invested through Pep transfers or an Isa are free of tax on income, unlike equity funds.

I particularly like five European high-yielding trusts issued by Invesco Perpetual, Threadneedle, M&G, Henderson and Newton, all of which have first-class managers and are yielding over 10 per cent. I also like M&G&#39s emerging markets bond, which invests almost entirely in government bonds and yields 11.5 per cent.

Other high-yielding bond funds I like are Aberdeen fixed interest and Threadneedle UK high yield.

There have been very few defaults in this sector over the past 50 years and governments are now even more conscious of the severe economic consequences of defaulting.


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