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Fund Review: Distribution funds


The advent of pension freedoms earlier this year has been seen as an opportunity for many to improve their retirement incomes. But with the strong equity market performance of recent years having pushed down dividend yields, it is no surprise investors are looking for alternative income sources.

For some, distribution funds are coming to the fore. Once a staple of life companies with a traditional equity-bond split of somewhere around 60:40, these vehicles have evolved and offer a much broader spread of income with many falling into the Investment Association (IA) Mixed Investment sectors.

A search of the IA sectors reveals 23 funds with ‘distribution’ in the title, with some such as the Aviva Investors Distribution fund going back decades, while others have launched in the past couple of months, like the Jupiter Enhanced Distribution fund.

So what makes distribution funds so appealing?

Rob Morgan, pensions and investment analyst at Charles Stanley Direct, notes: “Across the developed world, the need for income has been rising, but so have the challenges in meeting this demand. Distribution funds are therefore more relevant than ever – but no longer are they simply funds that combine UK bonds and equities; many are truly multi-asset vehicles.”

This diversification is key for many, with Gary Potter, co-manager of the F&C MM Navigator Distribution, noting markets are currently plagued by uncertainty.

“We’re not gung-ho,” he notes. “We’re marginally overweight equity but we’re not betting the ranch right now. So we’re pro-equity and underweight bonds in a controlled fashion and we still think there are some interesting features within specialist asset classes, be it equity or bond related.”

While Mr Potter notes a number of distribution funds have a higher allocation to property, he warns that it is important to “look through an asset class”, too. In his fund, a primary concern is “diversification”, although he is “also mindful of liquidity in the market”.

The popularity of these vehicles can also be partly attributed to their consistent performance, with distribution funds accounting for four of the five members of the Investment Adviser 100 Club Mixed Asset Income category in 2015.

This includes the Premier Multi-Asset Distribution fund, which was the fourth best-selling adviser-sold fund in August, according to research from FundsNetwork, and the second best-selling fund within Isas, beaten only by Woodford Equity Income.

In addition, the average return of IA-listed distribution funds with at least a one-year track record has outperformed the average of the four mixed investment and flexible investment sectors across three, five and 10 years, according to data from FE Analytics.

With income likely to remain an overriding concern for many investors as interest rates remain low around the globe, a diversified portfolio with a focus on income is not something to be sniffed at.


Axa Ethical Distribution

Managed by Richard Marwood, this £165m fund was launched in 2008 and aims to achieve a growing income with some prospects for capital growth. Unlike some of its peers the asset allocation follows a traditional equity-bond split, with 58 per cent of the portfolio in sterling equities and 34 per cent in sterling index-linked bonds, with the remainder in government bonds and cash. The performance has been consistent, propelling it into the IA 100 Club for the first time in 2015, delivering a five-year return to October 15 of 41.5 per cent against the IA Mixed Investment 20-60% Shares sector average of 23.7 per cent.

Artemis Monthly Distribution

This £57m fund is managed by James Foster and Jacob de Tusch-Lec with the aim of achieving income in addition to capital growth. It holds 45 per cent in equities, with a further 39 per cent in non-investment-grade bonds and the majority of the remainder in investment-grade debt. Launched in May 2012, it has outperformed the IA Mixed Investment 20-60% Shares sector average across both one and three years, posting a three-year return of 35.9 per cent against the peer group average of 16.1 per cent.


SLI Dynamic Distribution

This £317m fund was launched in February 2006 and is managed by Jacqueline Lowe and Iain McLeod. It aims to provide growth by investing solely in funds managed or operated within Standard Life Investments (SLI), although it can invest across equities, bonds, property and cash. The fund has appeared in the IA 100 Club in 2013 and 2015, and has delivered consistent performance, with a five-year return of 46.8 per cent almost double the IA Mixed Investment 20-60% Shares sector average of 23.7 per cent. The largest allocation is to the SLI UK Equity High Income fund, while it also holds 14 per cent in the SLI UK Property fund.

In this special report