Bond funds giant slashes payout

INCOME seekers are facing another blow to their finances as one of the largest corporate bond funds slashes its total payout by almost a fifth.

Letters have this week gone out to the 100,000 investors in Norwich Union's £700m Monthly Income Plus fund telling them they will suffer a 17% drop in annual income.

From October 2003, they will get just 20p in income per share a month. The current payment is 24p per share.

So the mainly elderly investors in the fund will now get about 6% income a year rather than the 7% they've received since the fund last cut its income in November 2000. And as general interest rates fall or stay low, other corporate bond funds are likely to follow suit, says Ben Yearsley, of independent financial adviser (IFA) Hargreaves Lansdown. He adds: 'The others will have to cut, too, but they probably won't announce it - it will just happen.'

This latest move is another setback for income-seekers already reeling from the recent cut in Bank of England base rate, chopped rates from National Savings and reduced bonuses on with-profits funds.

And these cuts are unlikely to be the last.

NU's reason for slicing the income is to protect investors' capital. It claims the fund would be forced to use capital to meet income requirements if rates were set too high. Spokesman Ian Beggs says: 'We warned investors at the beginning of this year that the 7% income was unsustainable and might need to be lowered.'

Another change is the actual level of income received. Monthly payments will no longer be a fixed amount. Instead, they will vary depending on the level of income received by the fund that month. Beggs says: 'It means the payments may be slightly below 20p per share some months and slightly higher in others. We will, however, aim to smooth very large variations.'

Again, this new format aims to give more flexibility to the fund's manager, rather than its investors, because he won't have to meet stringent income requirements.

The fund invests mainly in corporate bonds, a form of IOU issued by companies which pays an annual income. NU tends to focus on bonds from financially secure firms at the quality end of the market. However, it has performed poorly in the past three years, figures from analysts Standard & Poor's show. In that time, it has turned an investment of £1,000 into £1,020.

In stark contrast, the average for the peer group over the same time was £1,182. These figures are the total return - including both income and capital gains or losses.

Hargreaves Lansdown has been telling clients to move out of this fund for the past six months. The IFA says that, even though fund manager Mark Gull is perfectly competent, he has inherited a portfolio full of dud holdings which is proving difficult to turn around. As there is no real equivalent to the fund, investors must look to more conservative funds - with even lower interest rates - or take on more risk to get a higher income.

At the 5% level, Yearsley recommends Fidelity Moneybuilder Income or Old Mutual Corporate Bond.

Investors wanting 7% or 8% income should try the much riskier Norwich Union's Higher Income Plus fund or New Star High Yield Bond.

At IFA Bestinvest, clients have also been advised to transfer out of the fund. Researcher Rob Harley suggests investors could consider another NU fund, Managed High Income, which has a similar income to pre- October Monthly Income Plus.

Other options include the conservative New Star (formerly Aberdeen) Sterling Bond and the higher risk Insight Monthly Income.