Managed Funds Looking for Income Funds

Difficult question.

The biggest problem with reporting income is making comparisons.

The usual way people look at income is as a type of yield calculation. But yield is problematic in that it relies on two variables - distribution AND price. If the price is low but the distribution is constant, then the yield rises. If you've already bought, you're going to get exactly the same distribution, despite the increased yield. Yield only tells you what return you should expect if you buy the same day the yield was calculated and if the future distribution is exactly the same as the future distribution.

Income percentages for managed funds are somewhat troublesome in their reporting. I believe the industry standard is to report income returns based on the unit price at the beginning of the financial year. Which of course means that if the market has risen strongly throughout the year, the annual income return will calculate to look much better than it really is.

The other problem is the industry standard means of reporting overall performance. To normalise differences between different types of funds, different trading styles, different distribution frequencies, and so on ... the standard way of calculating return is to work it out based on a theoretical $10,000 invested at the start of the reporting period with all distributions reinvested. This effectively hides income from the equation, since you don't get to keep it in this model (for "fairness" in comparing growth vs income funds).

So if we were to try and use a similar mechanism for comparing income, we run into difficulties. The standard mechanism is to show all income reinvested - but if we do that, two things happen: 1) we don't get to keep the cash (cashflow is not improved by the investment), and 2) future returns are boosted by the income that was reinvested (compounding income). It is also difficult to consider after-tax returns, since there are too many different variables to make individual comparisons meaningful.

I guess if you are only looking at income funds and your goal is to take the distributions and use them for your own purposes, then you could do a comparative calculation based on a theoretical $10,000 invested at the beginning of the period, and then look at the total income returned over the period with no reinvesting.

I could probably set something like this up in Compare Funds (would take a while - not going to happen in the next couple of months ) ... that would be an interesting perspective to consider in comparisons. I'll make a note of that.

Are you familiar with the NavraInvest Blue Chip Australian Share Fund? That has a history of providing pretty good income returns (average > 12%pa over past 5 years, including the slow period during GFC when they moved to 100% cash).

I haven't really investigated other funds for comparison, so I can't make any suggestions. There are some buy/write (I think they are called?) funds out there which produce income, but I'm not sure how well they have done of late.

One question I do have though is ... why income fund? Income is expensive (after tax), unless you have losses to offset it against (eg negative cashflow property or margin loans).

Have you considered using something like the STW ETF as a growth engine (with a bit of income thrown in), selling down units as required to top up your cashflow requirements? Requires discipline to manage your capital and not over-spend, but it can potentially give you better after-tax returns considering that most of the future income comes from capital gains, which you don't pay tax on until you sell, and if you've held for > 12 months you get a 50% discount on anyway.

Just a thought.