Income is an important part of every pension portfolio. The challenge for retirees seeking income is not to take too much risk. Often, the highest-yielding funds are less diversified and riskier than their lower-return brethren.
Investing in a riskier fund is fine if you do it in moderation and plan to hold it for the long term. As long as you don’t have to sell the fund, you can continue to get the income from the return and not worry about what the price is doing. Also keep an eye on costs, as actively managed income funds can add up the cost scale. That said, here are five solid income funds for retirement investors that can handle a little bump in their ride:
— Intrepid Income Fund (ticker: ICMUX)
— Vanguard Wellesley Income Fund Investor Shares (VWINX)
— Fidelity Strategic Income Fund (FADMX)
— Invesco Rochester Municipal Opportunity Fund (ORNAX)
— Invesco Senior Floating Rate Fund (OOSAX)
Intrepid Income Fund (ICMUX)
If yield is what you’re looking for, ICMUX should be on your radar. With a trailing 12-month return of 6.39%, this is a fund to write home about. As is always the case with returns, higher returns often come with higher risk, something retirees should think carefully about. ICMUX portfolio manager Hunter Hayes says his team aims for returns that are higher than inflation but with a conservative risk profile by focusing on relatively short-dated bonds that they believe offer a premium over other fixed income securities.
“We believe we get a small share premium by owning these issues that larger asset managers can’t,” said Hayes. They also target unrated securities that “don’t get the love of bigger asset managers” with mandates to own only rated bonds, but which the team believes are creditworthy based on their internal rating model. Finally, to further mitigate the risk, the managers limit the maturity to give themselves a better understanding of the company’s ability to repay its debts and the risk of rising inflation. As a result of these measures, the fund has a high return compared to the category average with a lower than average risk, according to Morningstar. Also of note, the fund managed by Hayes has risen from a one-star Morningstar fund to a four-star fund since January 2019.
Vanguard Wellesley Income Fund (VWINX)
The Vanguard Wellesley Income Fund focuses on: sustainable income by investing approximately 35% of the portfolio in strong dividend-paying companies with a dividend yield higher than the S&P 500 at the time of purchase. The remaining 65% is then invested in fixed income securities, most of which are investment grade corporate bonds. The longer duration of the fund, or how long it borrows a company money, does make it more sensitive to interest rate movements, because it cannot replace old bonds as quickly as interest rates change. However, at an expense ratio of 0.22%, the lagging 12-month yield of 2.35% is well worth the price. If you have $50,000 to invest in the fund, you can buy the cheaper Admiral ( VWIAX) share class, which has the same benefits at an expense ratio of 0.16%.
Fidelity Strategic Income Fund (FADMX)
The Fidelity Strategic Income Fund is designed to provide high current income while keeping an eye on capital preservation. It is a good income option for retirees with a moderate risk tolerance. The fund offers above-average returns with medium risk compared to the multi-sector bond category, meaning it has some risky features. It mainly invests in high yield bonds, which could translate into higher credit risk and more volatility than some retirees may want. It currently yields about 3.34%. An expense ratio of 0.67% places it below average for fees compared to peers. Morningstar’s analysts value it for its low cost, “well-defined and repeatable process, experienced leadership and extensive resources,” thanks to Fidelity’s parent company.
Invesco Rochester Municipal Opportunity Fund (ORNAX)
John Bergquist, managing member of Lift Financial, has leveraged the Invesco Rochester Municipal Opportunities Fund ( ORNAX) in client portfolios for over a decade. The fund stands out from its peers with its 12-month return of 4.23%, but the recent rate hike is also rising above the category average. The fund has a front-end tax of up to 4.25%, so unless you buy it through a broker who waives the fund’s sales tax, it may not be the most economical option. Be one municipal fund means that investors get the added benefit of tax-free income, which means you have to keep this fund in a taxable account so you don’t negate that benefit. Bergquist adds that ORNAX is a higher risk fund compared to other income funds, “so it should be used as part of a diversified portfolio, not as a standalone portfolio.” ORNAX ranks #1 in the high-yield muni category according to US News & World Report.
Invesco Senior Floating Rate Fund (OOSAX)
Another income fund Bergquist has turned to OOSAX for many years, which invests in floating rate loans. “The Invesco Senior Floating Rate Fund is a great fund that will ‘float’ with interest,” he says. “So in the current interest rate environment, this fund would perform well.” It also has an impressive 12 month yield of 4.28%, but like ORNAX it comes with a hefty price tag if your broker doesn’t waive the 3.25% sales tax. It’s also not without risks, as is generally required if you want high returns: although the fund’s new lead manager has reduced the fund’s equity exposure and over-concentration, the portfolio still relies more on lower-rated loans and shares than its competitors.