Fund of the week: A good source of income for the brave

With the eurozone crisis still hanging over global markets, and data from China confirming that growth in the world's second-largest economy is slowing, it's unsurprising that investors continue to flock to the relative safety of income-paying investment trusts. Unfortunately, that's made some of them look expensive, says Investors Chronicle. However, a cheaper, if riskier, option for income-seekers is available: high-income investment trusts.

Take the City Merchants High Yield (LSE: CMHY) investment trust. It trades at a 3.32% discount to net asset value (NAV the value of its underlying investments), despite offering an inflation-busting 5.1% yield and a solid record of long-term returns. Including reinvested income, it is up 38.5% over three years and 28.5% over five years. Managed by Invesco Perpetual's co-heads of fixed income Paul Read and Paul Causer, the trust invests in a mix of high-yield bonds and shares in dividend-paying blue-chip firms.

"We continue to favour higher credit quality, high-yield issuers as well as higher-yielding investment-grade names," say the managers in a recent note. "Their yields remain at relatively high levels and we believe we can find opportunities, most notably in banks and other financials."

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As a bonus the fund has "relatively low levels of debt", says Investors Chronicle and a "very reasonable" ongoing charge of 1.08%. Over the last year the trust is up just 2%. However, the managers have proved themselves in the past, so "if you have a higher risk appetite and can invest for at least five years, City Merchants High Yield trust could be a good source of income".

City Merchants HighYieldtop ten holdings