In advance of these changes, FE Trustnet is putting retirement income under the spotlight by conducting reviews of the major sectors which income investors could consider in retirement and asking the experts to suggest portfolios that can meet income goals.
The first article looking at individual funds from the Investment Association’s four mixed investment sectors. Of course, this shouldn’t not be taken as advice to buy these funds, just as a suggestion for further research into funds that appear to be set up to deliver regular income for those in retirement.
To narrow down potential building blocks for investors, FE Trustnet applied a range of filters to the IA Flexible, Mixed Investment 40%-85% Shares, Mixed Investment 20%-60% Shares and Mixed Investment 0%-35% Shares sectors to find those with appropriate attributes. We did the same with the IA Unclassified sector, as this is home to a number of multi-asset funds that don’t to sit in the conventional sectors.
We searched for funds that: distribute income monthly, as most people will want payouts to be as regular as possible; have some of the lowest volatility and maximum drawdown of their sector; and have a good performance track record, to ensure some prospect of capital growth.
In addition, we looked at the actual income paid out over 2013 and 2014. While this is a short time frame, it gives investors a picture of how much the funds can distribute in current market conditions, where income has been harder to come by than in the more distant past.
FE Analytics shows 23 funds from the four mixed-asset sectors distribute income on a monthly basis, while the IA Unclassified sector is home to even more potential candidates - 27 in all. We take a look at the four multi-asset sectors below.
IA Mixed Investment 20%-60% Shares
This sector is a popular with retirement investors, thanks to the balanced approach taken by members of the peer group and the potential for them to have a higher weighting to bonds. With total assets of £45.1bn, it’s the sixth largest in the Investment Association universe.
Our analysis shows 12 of the sector’s member distribute monthly. The ones that have managed to combine low volatility and maximum drawdown since inception with a relatively high level of income are Artemis Monthly Distribution, FP Russell Multi Asset Income and Schroder Managed Monthly High Income.
All of the above are first quartile for both annualised volatility and max drawdown since launch, although they tend have quite short track records so far. The graph below shows their income payouts on an initial investment of £10,000 over the past two calendar years, where yield has generally been hard to come by.
Income earned on £10,000 over 2yrs
Source: FE Analytics
Stripping income away to see how the funds’ capital performance held up over the two years shows the Schroder and Russell funds made a respective 1.87 and 3.83 per cent, which may disappoint. Artemis Monthly Distribution fared much better with a 16.33 per cent return.
Of course, given all these funds launched in 2012 some investors may prefer to look at alternatives with more established track records. From a ratings point of view, Henderson Cautious Managed and Invesco Perpetual Distribution stand out.
Henderson Cautious Managed is headed by Chris Burvill and the FE Alpha Manager duo of John Pattullo and Jenna Barnard. It holds four FE Crowns and appears on the FE Research team’s Select 100.
Its annualised volatility since launch in February 2003 is 6.80 per cent while its maximum drawdown was 18.14 per cent. Looking at income and the £2bn fund has paid out just over £782 on an initial investment of £10,000 made at the start of 2013; over this same time frame, the capital return made by the fund has been 10.61 per cent.
Paul Causer, Paul Read and Ciaran Mallon’s Invesco Perpetual Distribution fund holds five crowns and is another member of the FE Research Select 100, where it is highlighted for its experience management and attractiveness to income investors.
Since inception in January 2004 its annualised volatility has been 8.33 per cent but its max drawdown may be too high for some at 26.92 per cent. An initial investment of £10,000 would have paid out a total of £997 over the past two years, with capital performance of 9.87 per cent.
Income earned on £10,000 over 2yrs
Source: FE Analytics
Mixed Investment 40%-85% Shares
This sector is also highly popular with investors - with total assets of £51.4bn, it’s the fifth largest in the Investment Association universe. However, this doesn’t mean it is full of funds that jump out as ideal retirement income options as only two of its 143 members pay a monthly income.
Both of these – CF Heartwood Balanced Income Multi Asset and Fidelity Moneybuilder Balanced – potentially fit the bill, having lower volatility and maximum drawdown than the average fund in their sector.
With assets of just £40.1m, David Absolon’s CF Heartwood Balanced Income Multi Asset fund is likely be off the radar of most investor but its three FE Crown rating suggests a decent track record over recent years.
The fund only launched in March 2010 but since then has returned 32.07 per cent, which is broadly in line with the average fund in the sector. When income is stripped out its capital return since inception has been 14.88 per cent.
It’s also first quartile for both annualised volatility, which stood at 7.10 per cent, and maximum drawdown, which was just 8.45 per cent. A £10,000 initial investment has paid out £383 since the fund started distributing in June 2013.
FE Alpha Manager Ian Spreadbury and Michael Clark’s £457.9m Fidelity Moneybuilder Balanced fund has a better record in putting money in investors’ pockets, with a two-year payout of £997 on an initial £10,000. Its capital return over this time was 12.32 per cent.
The fund’s annualised volatility since launch has been 8.53 per cent but its maximum drawdown is much higher than the Heartwood offering at 22.19 per cent.
It also appears on our Select 100, with the FE Research team saying: “Compared with other funds that aim to provide a regular earnings stream – whether that is through investing in equities, debt or both – the high level of income that Fidelity Moneybuilder Balanced pays out makes it an above-average performer.”
Income earned on £10,000 over 2yrs
Source: FE Analytics
IA Mixed Investment 0%-35% Shares
The sector is one of the smaller with assets of just £6bn and our research shows it’s more difficult to find a regular income payer with characteristics we’re looking for. None of the four funds that pay out monthly are top quartile for annualised volatility and max drawdown.
Jaime Arguello’s £114.6m Barclays Income Plus Portfolio is second quartile on both criteria since launch in April 2010. Over 2013 and 2014 it paid out £631 on an initial £10,000 but the one FE Crown fund lost 0.98 per cent in capital terms, which is not ideal for a retirement portfolio.
Alastair Gunn and Rhys Petheram's £512m Jupiter Distribution stands out from a ratings point of view, holding five crowns and appearing on the FE Research Select 100. It’s paid out £695 on £10,000 over two years with a capital return of 9.14 per cent.
However, the fund has been one of the most volatile in the sector, with an annualised score of 6.12 per cent since launch in March 2002, and has one of the highest maximum drawdowns at 21.92 per cent. While this are high relative to its peers, they are much lower than the FTSE All Share.
Income earned on £10,000 over 2yrs
Source: FE Analytics
IA Flexible Investment
This sector proved to be hardest from which to find contenders as good one-stop-shop retirement income funds. Only five of the 136 funds in the space pay out income on a monthly basis and most of these are focused on emerging markets, which many retirees would be reluctant to have at the core of their portfolio.
In addition, most pay a relatively low income relative to the other sectors or have yet to start distributing. Meanwhile, while two of the global focused funds have made capital returns of about 20 per cent during 2013 and 2014, the three looking at emerging markets have lost investors money.
With these considerations in mind, FE Trustnet can’t find any members of the sector that looks appropriate for retirement income investors based on the criteria laid out at the start of the study. We’ll return to the sector in a future article to see if they are any options for those who can manage on quarterly distributions.
As mentioned at the start of the article, there are 27 funds in the IA Unclassified sector that distribute income monthly and FE Trustnet will put these funds under our retirement income microscope in a future article.