The hunt for income has been a significant challenge for almost a decade, as soaring bond markets and growth-focused equity markets work together to push yields lower and lower.
But the desire for income has only grown, particularly with retirees collectively moving towards income-drawdown products, either via pension freedoms or transferring out of defined benefit arrangements.
The FCA’s recent study into the retirement market suggests the proportion of retirees using income drawdown plans has increased from 5 to 30 per cent since April 2015.
Fund groups have responded. The rise in the number of equity income and multi-asset income funds has been noteworthy. However, retirees are often cautious, and demand for traditional balanced distribution funds has also been strong.
The space is long-established. Of the 18 distribution funds in the IA sectors, only six were launched this decade, with five initiated in the last century, data from FE Analytics shows.
The funds’ yields have remained relatively strong despite the environment, ranging from 4.8 per cent, for the £3bn Invesco Perpetual Distribution vehicle, to 1.3 per cent. However, Invesco’s yield has come with significant exposure to riskier asset classes, demonstrating the challenging time for distribution strategies.
Sitting in the IA Mixed Investment 20-60% Shares sector, the Invesco fund holds around 34 per cent in equities, but has 45 per cent in sub-investment-grade debt.
The next big yielder, the £1.2bn F&C Multi-manager Navigator Distribution fund, has 49 per cent in equities, moving towards the upper limits of its stock exposure.
The debate over how distribution vehicles best access balanced and risk-adjusted income is set to continue, with the risk tolerance of investors continuing to be at the forefront of distribution managers’ minds, amid a need to go further up the risk scale to keep yields acceptable.
Such considerations have not necessarily meant distribution funds have become growth vehicles with exposure to riskier assets. Over three years, few distribution offerings have outperformed growth-focused peers in the same IA sectors.
The Artemis Monthly Distribution strategy is one exception, as it sits at the top of IA Mixed Investment 20-60% Shares peer group over this period with a yield of 4.1 per cent.
Artemis managers James Foster and Jacob de Tusch-Lec acknowledge they have been pushed out to what are normally riskier spaces. But the pair say they feel more comfortable in such assets given the current environment and outlook for the more conventional income-producing investment-grade and government debt markets.
“We remain comfortable that some of the safer places to invest are what have traditionally been regarded as ‘risky’ sectors, such as high-yield bonds and debt issued by financial companies,” the managers say.
“Although government bonds are performing well for now, we are not inclined to change our view that inflation is likely to increase, necessitating a tightening of monetary policy.”
THE PICKS
Premier Multi-Asset Distribution
This £1.2bn fund, run by the firm’s multi-asset quartet David Hambridge, Ian Rees, Simon Evan-Cook and David Thornton, is a stalwart of the group. The vehicle is top quartile over all measurable time periods with a yield of 4.2 per cent. It returned 26 per cent over three years versus an average of 20 per cent for the IA Mixed Investment 20-60% Shares sector. Returns in the multi-manager fund have come from a balanced exposure to both bonds and equities, but with 10 per cent also allocated to property and alternatives.
Axa Ethical Distribution
Jim Stride managed Axa Investment Managers’ five-strong distribution range since 1984, but handed over the reigns to Matthew Huddart and Jamie Forbes-Wilson at the end of June ahead of his retirement. The duo became co-managers last year, looking to absorb Mr Stride’s wealth of experience in running distribution strategies. The £216m fund is first quartile on a one-, three- and five-year basis, and yields 2 per cent. This is with a heavy, but ethical, equity bias. Time will tell as to whether the former manager’s legacy can continue.
EDITOR’S PICK
Artemis Monthly Distribution
Jacob de Tusch-Lec and James Foster have attempted to create a high-performing and strong-yielding fund, and their £518m strategy is doing just that. They have returned 37 per cent over three years and 86 per cent over five, far above the IA Mixed Investment 20-60% Shares sector averages of 20 and 39 per cent, respectively. With a yield of 4.1 per cent, this has not come at the expense of income. The strategy takes big bets in the fixed income market in particular. A third of the portfolio is in high yield, while financials is the largest exposure across the offering.
