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A top-performing income fund to help you through retirement

21 March 2014

Investors who rely on a monthly income often have to shape a portfolio of funds that pay dividends at different times of the year, but there are some that do the job for you.

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Equity income funds that pay a monthly dividend are ideal products for investors in or approaching retirement, according to Chase de Vere’s Patrick Connolly, who backs Jonathan Barber’s Threadneedle UK Monthly Income fund for his clients.

The potential for permanent loss from equities means that investors nearing retirement shouldn’t have all their eggs in the equity income basket; however, Connolly says those that pay a monthly income are an effective way to diversify your income stream away from low-yielding cash and bonds.

There are only a handful of these vehicles in the IMA UK Equity Income sector, the largest by some distance being the Threadneedle UK Monthly Income fund.

ALT_TAG “We have it as an option for those who want a monthly income,” said Connolly (pictured). “It’s there entirely by merit – if there wasn’t a monthly income fund that was good enough we wouldn’t hold one, but we rate the Threadneedle fund highly.”

“The fund smoothes the dividend over the 12 month period which is ideal for someone who relies on income to pay the bills. We are a supporter of the whole team at Threadneedle, holding [FE Alpha Manager Leigh Harrison’s Threadneedle UK Equity Income fund] as well.”

Threadneedle UK Monthly Income is currently yielding 3.7 per cent, and pays a dividend on the 8th day of every month, with the exception of March when it pays on the 10th. It pays out an equal measure of dividends every month, paying anything excess in March.

In the last calendar year, it paid out .21p between April and February, and .46p in March.

It is held by three fund of funds in the IMA unit trust and OEIC universe, including the £212bn Henderson Multi Manager Distribution portfolio, which itself pays out a dividend quarterly.

Portfolio manager James de Bunsen commented: “It is rare to find a fund like this that pays out a dividend. It’s great for us because it helps us to calculate and estimate our own income stream.”

“We view the fund as a very good core holding. [Barber] doesn’t try and shoot the lights out, but isn’t going to let you down.”

“The whole Threadneedle team is very well resourced, and it currently fits in nicely with where we see the world. We have been top slicing small and mid cap-focused holdings that have done very well, putting the money into large caps instead.”

Barber’s fund has a 60 per cent weighting to large caps, with FTSE 100 giants such as GlaxoSmithKline, Vodafone, Shell and National Grid in its top-10.

De Bunsen says these large caps give the fund a layer of stability, as not only are they established quality companies but also have a strong history of paying dividends. He says the Henderson team has held the Threadneedle fund since 2011, and it has successfully grown its dividend every year since then.

“It’s not all about yield, but growing dividends,” De Bunsen said. “The manager came in and saw us recently and said he expected dividend growth to be 7.5 per cent in 2013/2014, which is great. It grew at 5 per cent in 2012/2013) after 10 per cent in 2011/2012.”

“It’s also encouraging to note that the manager has run the fund for 11-and-a-halfbeen on the team since 1992. The average manager is on a fund for more like two years, so this stability is welcomed,” he added.

Threadneedle UK Monthly Income currently has a 5.38 per cent weighting in Henderson Multi Manager Distribution, making it its fourth largest holding.


An investment of £10,000 in Barber’s fund a decade ago has delivered almost £6,000 in dividends alone.

Income earned on £10,000 over 10yrs

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Source: FE Analytics

As well as excelling from an income point of view, Barber has managed to keep up with its sector and benchmark when looking at total returns – particularly impressive given that the fund has to hit a stringent income target. Most investors are likely to retain the dividends paid out every month, but the fund’s competitive capital growth is likely to be viewed as a welcome bonus.

FE data shows that Threadneedle UK Monthly Income has beaten its IMA UK Equity Income sector average over a one, three, five and 10 year period. It has also been consistently less volatile and has a significantly lower max drawdown over the last decade.

Returns are particularly strong over a 10 year period, helping the fund to top-quartile performance.

Performance of fund, sector and index over 10yrs

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Source: FE Analytics

“The need to pay monthly dividends does not inhibit the fund in investing in lower yielding stocks with potentially better dividend growth or higher capital return prospects,” said Barber. “Neither are options or overseas stocks needed. This is a ‘plain vanilla’ fund which aims to do the simple things well.”

Barber confirms that his fund is unique in having an unbroken 11 year record of paying equal monthly dividend payments each year, followed by a final payment which is typically twice the level of the 11 individual preceding monthly payments.

“As well as the smoothness of the monthly payments during the course of each year, the fund has one of the best records in the sector in terms of dividend progression over the years,” said the manager.

“Dividends grew every year for the decade from the funds re-launch in March 1988 until March 2009 by an average of 4.5 per cent per annum.”

“After a flat 2009/2010 the 12.5 per cent reduction in 2010/2011 represented one of the smallest peak to trough declines registered by any UK Equity Income fund. In the subsequent three years dividends have grown by an average of approximately 7.5 per cent per year.”


Barber pinpoints two important factors that differentiate the funds from the majority of others in the UK Equity Income sector.

“The fund manager has to be very organised – in practise this means all expected dividends payments are modelled out over the fund’s next financial year, ending 7 March,” he said.

“This acts as more of a barometer than a thermometer until just before the year end. Every week expected payments are reconciled to actual payments received and forecasts adjusted accordingly.”

“Secondly, the fund has to hold slightly more stocks than it would otherwise do in order to help balance the payments over the year. In practise this means that the fund currently owns 73 stocks when, without the requirement to make monthly payments, it might otherwise hold around 65.”

This article was written in collaboration with and is sponsored by Threadneedle Investments.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.