There has been renewed interest in funds paying an income since the introduction of the pension freedoms last year. The need for regular income later in life has seen a raft of multi-asset income funds come to market, but distribution funds are also proving a popular choice for the more cautious investor.
With asset classes such as equities and fixed income struggling to deliver much in the way of income in the current environment, distribution funds are an appealing prospect with their ability to search far and wide for yield.
A search of Investment Association (IA) funds with distribution in the title reveals there are 24 such vehicles, many of which sit in the IA Mixed Investment sectors. Last year saw two distribution portfolio launches: Axa Lifetime Distribution, which is co-managed by Jim Stride and Jamie Forbes-Wilson, and Alastair Gunn and Rhys Petheram’s Jupiter Enhanced Distribution. In 2016 the fund of funds TB Doherty Distribution product launched.
According to FundsNetwork, vehicles with a diverse investment strategy were in favour in July. Among its bestselling vehicles sold through Isas in July were two distribution products: Premier Multi-Asset Distribution and Jupiter Distribution – both of which outsold the CF Woodford Equity Income fund.
The uncertainty created by the UK’s vote to exit the EU means distribution funds are likely to see further inflows.
Danny Wynn, head of fund partners for Fidelity International, says: “As investors started to digest what Brexit meant for them and their investments, we continued to see them adopting a defensive position and favour cash instruments or seek to add some diversification to their portfolios.
“With further uncertainty on the horizon, especially in the form of the US elections, it’s likely we are going to see this trend being maintained in the coming months.”
Gary Potter, co-manager of the F&C MM Navigator Distribution fund, observes: “When it comes to income you certainly don’t want to put the majority of your eggs in one basket because we all know things can go wrong. When you’re a pensioner or perhaps [someone] in their 40s who uses a regular income for school fees, you do not want the volatility in your income at a critical time or phase in your life.”
He believes distribution vehicles are “an entirely sensible” way to invest for income because they are so diversified.
But Jason Hollands, managing director at Tilney Bestinvest, suggests distribution funds are “a product from the past, aimed at investors who wanted a fairly conservative, ‘steady-eddy’ approach with a combination of equities and bonds – a bit like they may have had with an old-school balanced pension fund”.
Mr Hollands adds: “These have now been eclipsed by multi-asset funds, which will invest in a broader range of asset classes that might also include property and commodities, among advisers and most DIY investors, who prefer to build their own selection of equity and bond funds rather than take a package like these from an adviser.
“In the past, the bond exposure provided a combination of income yield and some stability to offset the equity exposure, but with bond yields so low this hasn’t helped as much as in the past.”