Reap top returns for a bit more risk

This IC Top 100 Fund aims to achieve a balance of income and capital growth via a mixed portfolio of mainly UK equities and bonds, with an emphasis on the fixed income side. The equities portion is run by Neil Woodford, considered to be one of the best UK equity income managers, while veteran bond fund managers Paul Causer and Paul Read run the fixed income portion.

The fund has delivered leading returns: it is among the top five performers in the Investment Management Association (IMA) Mixed Investment 20%-60% Shares sector over one, three and five years, while its current yield is also one of the best in the sector.

"This fund essentially sits between Invesco Perpetual's High Income equities fund (run by Mr Woodford) and Monthly Income Plus Fund (GB0033051334) (which has more than 80 per cent of its assets in fixed interest)," says Jason Hollands, managing director at wealth manager Bestinvest. "Invesco Perpetual Distribution can move around depending on the relative attractions of bonds versus equities. At the moment around 36 per cent of the portfolio is in equities and the fixed income portfolio is skewed heavily in favour of high yield. For a larger client we would pick a combination of separate equity and bond funds from across the market but for a smaller investor this hybrid single fund approach offers a fund with volatility that sits mid way between bonds and equities."

Mr Woodford focuses on what he considers high quality companies with visible and sustainable earnings streams that are undervalued by the market, which typically leads to a more defensive equity portfolio. This is similar to the way he runs the Invesco Perpetual High Income (GB0033054015) and Invesco Perpetual Income (GB0033053827) funds, aiming to grow the income by investing in high yielding shares with a reliable cash flow. At the moment he sees businesses with these qualities in sectors such as tobacco and pharmaceuticals.

Mr Causer and Mr Read's search for undervalued securities has historically seen a bias to higher yielding corporate issuances, placing them at the more aggressive end of the fixed income spectrum. At the moment they think that bonds issued by financials continue to be one of the main areas of value, even in the context of higher volatility and recent gains. "The combination of structural and regulatory reform and rising capital levels should be supportive of subordinated bank debt for many years," they say.

Both the equity and fixed income investment styles, while highly successful over the long term, are at times contrarian in nature, which can lead to periods of underperformance over the short term, notes Peter Brunt, analyst at S&P Capital IQ Fund Research. But he adds: "The success of this fund lies in the fact that when one (asset segment) underperforms, the other tends to outperform to a greater degree."

The fund also makes positive returns in most calendar years.

So with outstanding performance, an attractive yield and top fund managers, for cautious investors with time on their hands who can stomach a bit more risk this fund could be a valuable portfolio addition. BUY.

Source: Morningstar, *Invesco Perpetual.

Performance

Morningstar as at 3 June 2013

Top five bond issuders as at 30 April 2013 (%)

Top five equity holdings as at 30 April 2013 (%)

Asset allocation (%)