Retired investors often have a specific income target and an aversion to losses. Bonds, therefore, make up a significant part of their portfolios but equities have a role to play as well by providing dividend income and capital growth.
Equity income funds tend to hold up better than bonds during periods of inflation, said Richard Parkin, head of retirement at BNY Mellon Investment Management.
He thinks actively-managed funds make more sense than passive trackers, “if you buy into the idea that retirement isn’t about maximising returns, it’s about avoiding losses”. Although most active managers struggle to keep up with raging bull markets, the best are adept at cushioning investors from bear markets and avoiding “howlers”, he said.
Jason Hollands, managing director of Bestinvest, recommended prioritising managers who focus on income growth potential, rather than trying to maximise current yields. “If you are going to supplement your retirement income through equity income funds, you will probably want to avoid erratic payouts but will also need to see both capital growth and income growth over time, so that payouts can keep pace with inflation,” he explained.
To that end, Trustnet asked fund selectors to recommend equity income funds that combine downside protection with growth potential.
Martin Currie UK Equity Income
Tom Stevenson, investment director at Fidelity International, argued for an allocation to UK equities.
“For investors looking to achieve a high and growing income stream in retirement, a UK equity income fund might fit the bill. The UK is traditionally a good source of equity income and today our domestic market stands at an attractive valuation discount to many other markets,” he said.
FTF Martin Currie UK Equity Income was Stevenson’s first choice. It is managed by FE fundinfo Alpha Manager Ben Russon, Colin Morton, Joanna Rands and Will Bradwell, who Stevenson said “have good experience in finding companies that can pay sustainable and growing dividends”.
The fund is relatively focused with 48 holdings, including Shell, BP, Unilever, AstraZeneca, National Grid and Imperial Brands.
BlackRock UK Income
Hollands suggested BlackRock UK Income because it “balances the need for stable, growing payouts with continued capital growth”. Managers Adam Avigdori and David Goldman have produced attractive returns with an above-market yield and the fund has held up well in difficult markets.
“The focus is on companies able or with the potential to pay a growing dividend alongside rising capital, rather than investing in businesses paying a high but stagnant yield. The managers are nimble and are able to move the portfolio around depending on the market environment and valuations,” Hollands said.
Performance of UK equity income funds vs benchmark over 10yrs
Source: FE Analytics
Evenlode Income and Evenlode Global Income
Hollands also recommended Evenlode Income, managed by Hugh Yarrow and Ben Peters. “The team has a clear and consistent investment philosophy, focused on high-quality companies with strong free cash flow that can support dividend growth and with a high return on capital. The managers prefer capital-lite businesses where shareholder capital isn’t constantly being drained by the need to reinvest heavily in things like plant and machinery,” he said.
“The fund may tend to lag in rising markets, but it has historically delivered strong and consistent outperformance.”
The fund’s global sibling is another solid choice for retired investors, according to Kamal Warraich, head of fund research at Canaccord Genuity Wealth Management. Evenlode Global Income focuses on generating attractive total returns, dividend growth and a sustainable income, he said.
“The portfolio is biased towards quality companies that generate high and consistent levels of free cash flow. Importantly, the hallmarks of this process tend to provide protection on the downside,” he explained.
JPMorgan Global Growth and Income and JPM Global Equity Income
Samir Shah, fund research analyst at Quilter Cheviot, said the JPMorgan Global Growth and Income trust is a good option for retired investors because it provides growth plus a 4% yield.
“The fund selects from only JPMorgan Asset Management’s firm-wide highest conviction ideas that offer superior earnings quality with a faster growth rate. In addition, it pays a dividend set at the beginning of each financial year equivalent to 4% of net asset value, which is funded by a combination of revenue and capital reserves,” Shah explained.
“Along with a strong track record of returns, the ability to pay a market-leading yield while also providing their best ideas from a total return perspective is attractive.”
The trust was trading at a discount of -1.1% as of 3 June 2024 and has £2.7bn in total assets. It is run by FE fundinfo Alpha Managers Helge Skibeli and Timothy Woodhouse along with James Cook.
Juliet Schooling Latter, research director at FundCalibre, recommended another JPMorgan AM strategy managed by Skibeli – JPM Global Equity Income, which takes a value-oriented approach. “The fund's experienced management team prioritises risk management, seeking to deliver a compelling yield without compromising growth potential,” she explained.
“The managers strategically balance ‘compounders’ (companies with consistent long-term growth), high-yielding stocks and higher-growth opportunities within the portfolio. This well-diversified strategy positions the fund as a core holding for investors seeking a balance of income and capital appreciation.”
Guinness Global Equity Income
Guinness Global Equity Income is an equal-weighted portfolio of around 35 stocks, split between cyclical and defensive names. Managed by Ian Mortimer and Matthew Page, the fund has low turnover, which limits transactions costs.
Sophie Turner, a research assistant at FE Investments, said: “This fund focuses on stocks with quality characteristics and low debt, which the managers believe can provide consistent performance throughout the entire economic style. It invests into companies which have strong balance sheets and the ability to grow their dividend stream over time.
“This strong emphasis on quality and dividend growth names means the fund protects well in downturns but tends to lag in strong bull markets. The fund has shown consistent best-in-class performance over a long period, as a result of its well defined, robust and repeatable process.”
Performance of global funds vs MSCI ACWI over 10yrs
Source: FE Analytics
Fidelity Global Enhanced Income and Fidelity Global Dividend
Fidelity Global Enhanced Income uses derivatives to generate extra dividend income, with 40-60% of the fund overlaid by a covered call sleeve. This boosts the fund’s defensive profile, so it should protect capital in a falling market, although performance will lag when the stock market is rising, Turner said. Indeed, performance has been slightly below the fund’s benchmark since inception but with far less volatility.
The fund’s underlying stocks are also quite defensive, Turner pointed out. The managers – David Jehan, Fred Sykes, Jochen Breuer and Vincent Li – invest in companies with strong balance sheets and high-quality earnings which are trading at attractive valuations.
Meanwhile, Schooling Latter suggested another Fidelity International fund. “Fidelity Global Dividend is a core global income fund designed for investors seeking a stable and potentially rising stream of income,” she said.
The fund invests in companies with healthy and sustainable dividend yields, aiming to provide regular and growing distributions while prioritising capital preservation.
“We commend manager Dan Roberts’ value-driven philosophy, which emphasises disciplined investment. This reduces the risk of overpaying for stocks and potentially mitigating losses during market downturns,” she stated.