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It’s a dilemma that investors regularly face when deciding where to put their money: Should they be investing for growth or investing for income?
Unfortunately, there’s no simple answer. They are completely different strategies, and which is the most suitable option will depend on their investment goals and attitude to risk.
So, here is what you need to consider.
Broadly speaking, growth funds aim to increase the value of your investment over time. As a result, they can often favour faster-developing companies at early stages in their development.
Income funds, meanwhile, will target a steady stream of income – as their name suggests. This means they tend to invest in more stable, established, dividend paying names and/or companies that are growing their dividend.
Of course, income investors don’t have to take the money out. They can re-invest it to help build an even more substantial pot.
The choice of growth and income funds is vast with eager fund management houses constantly coming up with innovative solutions to attract investors.
This can have the effect of muddying the waters as the approaches taken can vary enormously, which is why you need to do research before committing your cash.
You will usually be able to tell whether a fund is focused on growth or income by reading its aims and objectives. Also, many will attempt to achieve both growth and income.
Each fund will take a slightly different approach. This means you will need to read its prospectus to find out exactly how it works.
For example, equity income funds will look to invest in companies that pay dividends – effectively, a share of the profits – that can be redistributed.
However, it’s important to recognise that dividends can be cut, suspended or completely cancelled for a variety of reasons. They are certainly not guaranteed.
There are also different types of equity income fund. While some are global in focus, others concentrate on a particular market, such as the UK.
For example, the Fidelity Global Dividend fund invests in companies that offer a healthy yield, underpinned by a growing level of income and the potential for capital growth. Its manager, Daniel Roberts, places significant emphasis on the sustainability of the dividend and whether the current share price provides an adequate margin of safety.
As its name suggests, the Guinness Asian Equity Income fund only invests in the Asia Pacific region, including Australia. Edmund Harriss and Mark Hammonds, the co-managers of the portfolio, focus on companies that can sustainably grow their dividends.
The IFSL Marlborough Multi Cap Income fund, meanwhile, aims to provide an income greater than the FTSE All-Share Index over any three-year period. It also ventures into the small cap space – which many other income funds avoid.
Another popular way of investing for income is through bond funds. These tend to be lower-risk investments than shares.
As the bond’s coupon (or interest) is contractual, it will definitely be paid, unless the company or government that has issued the bond goes bust.
The M&G Optimal Income fund invests at least 80% of its assets in bonds issued by governments and companies from around the world. This includes the emerging markets. The bonds are chosen based on in-depth analysis of issuers, along with an assessment of global, regional and country-specific macroeconomic factors.
Liontrust Monthly Income Bond aims to produce a monthly income, along with some capital growth, by investing in corporate and government bonds. It also has the flexibility to move between shorter or longer dated bonds in order to take advantage of any changes in interest rates.
Growth funds often invest in companies that don’t pay dividends because they are using every available financial resource to build for the future.
T. Rowe Price Global Focused Growth Equity invests in a diversified selection of companies with the potential for above-average and sustainable rates of earnings growth. Its holdings can be from anywhere in the world, including the emerging markets, and from a wide variety of sectors.
The Waverton European Capital Growth fund, meanwhile, is a high conviction portfolio that’s focused on larger businesses in the region that can create wealth and returns for shareholders. The managers, Chris Garsten and Charles Glasse, like growing companies with strong managements that are operating in favourable business environments.
Another fund with a concentrated approach is LF Blue Whale Growth. It invests in 25 to 35 high quality businesses, while paying close attention to valuations. Stephen Yiu, its lead fund manager, said: “The portfolio is positioned to take advantage of what we see as the key issues of the year to come – continued digital transformation, 5G rollout and a global economy cautiously emerging from pandemic.”
Alternatively, you can opt for a multi-manager approach through a fund such as the high conviction Jupiter Merlin Growth Portfolio. Its objective is to provide a return, net of fees, higher than the IA Flexible Investment Sector average over the long term, which is defined as at least five years.
Of course, you don’t have to choose between growth and income. It’s quite feasible to have exposure to both approaches within your overall portfolio.
In fact, some growth funds can also target an income. A prime example is the Baillie Gifford Japanese Income Growth fund, which is run by Matthew Brett and Karen See. It aims to benefit from Japan’s improving corporate governance now that an increasing number of companies are embracing a progressive dividend-paying policy.
Note: This article was originally published 28 April 2020 and updated on 12 April 2022.