Your IndustryOct 18 2013

Distribution funds - October 2013

pfs-logo
cisi-logo
CPD
Approx.50min

    Distribution funds - October 2013

      pfs-logo
      cisi-logo
      CPD
      Approx.50min
      Search supported by

      Introduction

      By Nyree Stewart
      twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon

      Distribution funds originally came from life offices looking for a way to enable investors to earn healthy level of regular income without having to sell units of their funds.

      They have evolved over time, and now there are more than 20 funds labelled ‘distribution’ sitting within the IMA sectors, from both traditional asset mangers such as Aberdeen, Jupiter and Invesco Perpetual, as well as traditional life offices such as Axa, Legal & General and Aviva.

      Richard Marwood, manager of the £913.7m Axa Distribution fund, says: “Actually now [distribution] is more used to describe mixed asset class funds. So if you look at all the retail funds that are available they mostly sit in the IMA Mixed Investment categories so they’ll have typically between 20-60 per cent in equities and then the balance of the portfolio in other assets that are non-equity to try and damp down the volatility.

      “The general usage these days has moved away from the original definition which is why distribution funds probably isn’t the best description of what they are, as they are mixed asset funds with a capped exposure to equity.”

      Mr Marwood points out there are no hard-and-fast rules about what should be in a distribution fund, noting that different fund houses and managers have differing ideas on what to do outside the equity portion.

      “We tend to have between 50-60 per cent in equities then we’ll have roughly 35 per cent in UK index-linked gilts then maybe 7 per cent in conventional gilts and 3 per cent in cash. But if you went to look at another fund you might find they have 45 per cent in equity and 55 per cent in corporate bonds. People approach this in a very different way.”

      David Hambidge, investment director, multi-asset funds at Premier, agrees that they are all different and suggests that distribution can be just another word for ‘income’.

      But he adds: “The subtle difference between a distribution fund and an income fund is that a distribution fund should have more emphasis on paying out income, while with some income funds the income is a by-product of what they invest in and there is no control over the distribution. From a financial planning point of view that is not much use to people in a world that is now becoming very income hungry.

      “A lot more emphasis going forward will be that if you call yourself an income fund or distribution fund, do you actually do that? And do you control the distributions? People want to have a little bit more confidence that they will get a regular and reliable income stream and not sporadic dividends paying out whenever they happen to be.”

      Mr Hambidge highlights the old distribution model was generally a combination of index-linked bonds and to a lesser extent equities.

      “There are still funds out there that still adopt that model, the only issue is that index-linked bonds are pretty expensive these days so the returns those types of funds have given in the past 15 years are unlikely to be repeated in the next 15 years.”

      He argues that the modern distribution funds “need to think about a lot of other types of asset classes beyond equities and both traditional and index linked bonds”.

      “The future of distribution funds goes well beyond equities and bonds and has to include other asset classes,” he adds.

      Both managers suggest the majority of people looking to these funds are looking for income, while there are also those who are looking for a cautious investment but with a better return than cash in a bank account.

      Mr Marwood notes: “What everyone is trying to do essentially [with distribution funds] is give some sense of equity exposure and use the other assets for diversification and to lower the overall volatility.

      “They’ve definitely got a place, we would see them as being a good core for somebody’s investment portfolio. I would see these as being perfect funds for people with a little money to invest but looking for something they don’t have to monitor all the time and keep rebalancing, these are funds that just tick along in the background and should work fine for investors over the long term.”

      With volatility expected to be a continuous presence in markets for the foreseeable future, the appeal of a relatively cautious, multi-asset fund with a reliable income stream could see a return in popularity of the potentially overlooked distribution fund.

      Nyree Stewart is deputy features editor at Investment Adviser

      THE ART OF DISTRIBUTION

      WHERE DID IT START?

      Widely considered to be the original distribution fund, life company Sun Life launched its product in the late 1970s, and was later managed by Jim Stride the veteran investor now in charge of AXA Investment Manager’s Distribution Fund range. The AXA IM Distribution team also manages the Friends Life Distribution Fund the present incarnation of the original Sun Life fund.

      A feature of life products at the time was the ability to take a 5 per cent annual tax free drawdown, but the only way to do that was to sell units, which saw the number of units in the product decrease each year, decreasing the investment. Many clients did not like that the number of units held was reducing with each payment. In response Sun Life came up with the idea of a Distribution Fund that kept the number of units constant; if you started with 1000 units you still have 1000 units. Instead of selling units it used some of the income from the investments to pay a distribution, hence the name of the fund.

      THE MAIN PLAYERS

      Aberdeen Asset Management

      Aberdeen has two ‘distribution’ funds available to retail investors - Managed Distribution and Multi Manager Multi Asset Distribution Portfolio. The former, led by Mike Turner, Aberdeen’s head of asset allocation, is the larger of the two at £105.9m. In the five years to October 10 2013, Aberdeen Managed Distribution fund has delivered 68.71 per cent, compared with the IMA Mixed Investment 20-60% Shares sector average return of 44.2 per cent for the same period.

      Jupiter Asset Management

      Alastair Gunn and Rhys Petheram have been co-managing the £311.2m Jupiter Distribution fund since 2010 and to date (October 10) have returned 52.3 per cent. This fund sits in the IMA Mixed Investment 0-35% Shares sector and invests in a mixture of fixed income and, primarily, UK equities. It currently has 35.15 per cent allocated to fixed interest and 33.71 per cent to equities.

      Invesco Perpetual

      The popular trio of Paul Causer, Paul Read and Neil Woodford make up the management of the £2.54bn Invesco Perpetual Distribution fund. The product launched in 2004 and invests in a portfolio of primarily UK equity and fixed interest securities, although the managers can use other tools, such as money market instruments, warrants and transferable securities in order to deliver their objective of both income and capital growth. This fund sits in the IMA Mixed Investment 20-60% Shares and in five years has delivered 100.4 per cent, more than double the sector average return of just 44.2 per cent. The fund’s peformance was highlighted further by winning the Mixed Asset Income category of the Investment Adviser 100 Club awards 2013.

      Axa Investment Managers

      Axa IM has four distribution funds available to retail investors - Defensive Distribution, Distribution, Ethical Distribution and Global Distribution. The group also offers one of the only ethical distribution funds, which launched in November 2008 and since then has returned 89.29 per cent compared with the IMA Mixed Investment 20-60% Shares sector average return of 49.95 per cent to October 10 2013.

      In this guide

      Articles
      CPD Questions
      To reveal the CPD questions which accompany this guide, please sign in and read all of the articles below.