The Dangers of Enhanced Income Funds

A recent report starkly showed the extent to which investors were sacrificing capital growth for income when buying so-called "enhanced income" funds

Cherry Reynard 24 March, 2017 | 10:12AM
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Enhanced income funds seem like a seductive solution to the difficulty of generating income in a low interest rate world. Paying income levels of 5% and higher, these funds have found a ready market with some funds now over £1 billion in size.

However, a recent Hargreaves Lansdown report starkly showed the extent to which investors were sacrificing capital growth for income in some cases.

How Do Enhanced Income Funds Work?

Within these funds, a manager holds a portfolio of shares, adding a layer of market bets with the aim to boost the returns. Usually, this is based on an existing fund – the Schroder Income Maximiser is based on the Schroder Income fund, for example. The manager, or – more usually, a specialist internal derivatives team – will then write options on certain stocks in the portfolio.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
ASI UK Income Unconstrained Eq I Acc93.77 GBP0.74Rating
BNY Mellon Equity Income Booster GBP Inc0.92 GBP0.49Rating
JOHCM UK Equity income B GBP Acc4.01 GBP0.96Rating
Schroder Income Acc102.20 GBP0.49Rating
Schroder Income Maximiser A Acc1.18 GBP0.34Rating

About Author

Cherry Reynard

Cherry Reynard  is a financial journalist writing for Morningstar.co.uk.