Popular Income Funds Have Risks of Their Own
It appears no fewer than four times on the top 10 list of best- selling funds for early 2005: Capital Income Builder, Capital World Growth & Income, Income Fund of America and the Franklin Income Fund. By comparison, "growth" shows up only three times and "global" just once.</br></br>Those four income funds together took in 20 cents of every dollar that went into all stock and bond funds in January and February, by my calculation using figures from the consulting firm Financial Research Corp. in Boston.</br></br>The investing public and their advisers, it appears, have embraced income funds as the great anti-speculation, a remedy for the excesses of the last great bull market. As an extra kicker, U.S. rules now give most dividends the same lower income tax rates accorded long-term capital gains.</br></br>The idea seems sound enough. The question is, could success spoil this pretty picture? Is everybody on guard against the danger of increased risk that tends to infiltrate any category of investments enjoying a hot streak? "We have great respect for dividend-paying ability as an indicator of quality," says Tom McManus, chief investment strategist in New York at Banc of America Securities LLC. "But today's investor seems to be chasing high current income without regard for growth or safety."</br></br>When you look at the recent performance of some of these funds, their popularity is no mystery. According to Bloomberg data, the $32.3 billion Franklin Income Fund averaged an 11.3 percent annual return over five years through the end of March, a period in which the Standard & Poor's 500-stock index posted a loss of 3.2 percent a year.