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."

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

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