Growing demand for regular streams of income is prompting more asset managers to increase the frequency of payments to clients, despite the greater costs involved.
An ageing population in an era of pension freedoms and low rates of interest has increased the need for funds to offer sustainable and frequent payouts as more clients use such products to draw down retirement income.
The first days of 2017 saw two such moves by fund firms: BMO Global Asset Management launched a monthly income share class for the F&C MM Navigator Distribution fund, and Miton moved from biannual to quarterly payments on its Income fund.
Matt Hollier, head of investment product at Heartwood Investment Management, said it is “not surprising” that an increasing number of clients are turning to their investments to meet their living expenses. Heartwood’s income products changed to monthly distribution payments in 2015.
“These investors have reached the ‘decumulation’ phase of their investing life cycle, and a predictable regular flow of money into their bank account is important to them – either to replace salary or to supplement other pension income,” Mr Hollier said.
“It is not surprising that with pension freedoms an increased number of investors are using such vehicles, and fund managers are changing products accordingly.”
For now, the number of funds that offer monthly income payments remains relatively limited. Figures from data provider Lipper show that 181 funds, out of a universe of 1,565, offer a share class that pays income on a monthly basis.
Meena Lakshmanan, partner at LGT Vestra, noted that introducing such capabilities comes at a cost for fund managers.
“There is very little benefit to the fund and this only increases administrative burden and potential cost increases because of that.”
But moving to more a more frequent payment schedule, which allows investors to either reinvest or save cash proceeds more efficiently, could give funds a competitive edge over their peers, according to Rathbones research analyst Alex Moore.
“Moves like this are often driven by client appetite. They can also offer a differentiating factor in what is a competitive space, particularly at a time when investors are keen for more frequent income streams,” he said.
As Investment Adviser reported last year, the growing use of funds for retirement arrangements has seen pensions overtake Isas as the product of choice for new money on adviser platforms.
Asset managers’ changes could also have benefits for regular investors, according to Cornelian investment director Hector Kilpatrick. More frequent payments allow funds to minimise the amount of cash they must set aside and become fully invested more quickly, he said.
“The income unitholder gets a more frequent distribution, and the accumulation unitholder gets the income reinvested more frequently into the fund.”
|Income funds payment frequency in 2016|
|Payments per year||Number of funds||Assets (£bn)||Share of total assets (%)|
|Based on income share classes that paid out to UK investors in 2016|
|Source: Lipper Thomson Reuters|