FE Trustnet is putting retirement income under the spotlight over the next few weeks, attempting to identify individual funds and core portfolios that could prove attractive for investors who need to rely on their funds to meet their income needs.
While future articles will widen the search to look for quarterly and bi-annual income funds, this one will focus on those that distribute monthly for those who do not want to blend products in order to achieve a regular income stream.
We searched for funds that: distribute income monthly, as some people will want pay outs to be as regular as possible; have some of the lowest volatility and maximum drawdown of their sector; and have a good performance track record, to ensure some prospect of capital growth.
In addition, we looked at the actual income paid out over 2013 and 2014. While this is a short time frame, it gives investors a picture of how much the funds can distribute in current market conditions, where income has been harder to come by than in the more distant past.
Our data shows that only six of the 90 funds in the IA UK Equity Income sector pay a dividend monthly, with one of these launching less than one year ago.
Source: FE Analytics
So, how do the above funds stack up when examined on metrics that are likely to be relevant to the portfolio of an investor in retirement, such as income earned, volatility and maximum drawdown, which shows the loss an investor would have faced if they bought and sold at the worst possible times over a set period?
Of the above UK equity income funds the one which has paid out the most income over the past two years is Insight Equity Income Booster.
Managed by Tim Rees since launch in March 2009, with Takis Anastassopoulos joining in October 2010, the £83.9m fund has paid out just under £1,700 on an initial investment of £10,000 made two years ago. But when income is stripped out, the fund has made a return of just 3.36 per cent.
Income earned on £10,000 over 2yrs
Source: FE Analytics
The fund achieves this high level of income by running a traditional equity portfolio combined with a call option strategy that enhances the income. The use of call options means this type of equity income fund can exchange capital gains for a higher level of income.
Since inception the fund has made a total return of 117.75 per cent, underperforming the 134.64 per cent rise in the FTSE All Share and the 135.07 per cent average return from the IA UK Equity Income sector. When income is stripped out, the fund has made a 38.29 per cent return.
Over this time the fund’s annualised volatility has been 13.58 per cent, which is lower than the All Share’s but higher than its average peer. At 17.41 per cent, its maximum drawdown is worse than the index and peer group.
Insight Equity Income Booster has a clean ongoing charges figure (OCF) of 0.88 per cent and is currently yielding 8.07 per cent.
Investors who dislike ‘enhanced’ equity income funds and their use of call options have other options in the UK equity income sector. Out of the five funds highlighted in this article, one that sits top quartile for both annualised volatility and maximum drawdown since launch is Querns Monthly Income.
At just £13.3m this fund, which is managed by Stephen Whittaker, may be off the radar for many investors but it won five FE Crowns for superior performance when it comes to stock picking, consistency and risk control over the past three years.
FE Analytics shows the fund’s annualised volatility since launch in June 2010 is 11.13 per cent while it has a maximum drawdown of 14.16 per cent. The fund is too young to have a track record for 2008, but it must be noted that it underperformed both the sector and the All Share in the down year of 2011 with a 7.42 per cent loss.
When it comes to income, the fund has paid out around £1,120 on an initial £10,000 invested two years ago. Its income share class has also made a capital return of 19.60 per cent over this time.
Income earned on £10,000 over 2yrs
Source: FE Analytics
Querns Monthly Income has a 1.84 per cent total expense ratio and currently yields 4.40 per cent.
Of the remaining UK focused funds, none have achieved top quartile annualised volatility and maximum drawdown since launch.
Jonathan Barber’s Threadneedle UK Monthly Income comes close. Its max drawdown since Barber took over the fund in June 2002 is top quartile at 42.88 per cent, although this may be too high for more cautious investors, while its annualised volatility is second quartile at 14.58 per cent.
Over the past two years an initial investment of £10,00 has put almost £960 in investors’ pockets, which is the lowest amount of the five monthly income payers. However, its capital return over this period is the second highest at 24.33 per cent.
Chris White’s four crown-rated Premier Monthly Income fund is second quartile for annualised volatility and max drawdown since the manager took over in December 2010. It’s paid out about £1,200 on an initial £10,000 two years ago, with capital returns of 19.05 per cent.
AXA Framlington Monthly Income has been managed by George Luckraft since September 2002. Since then, it’s in the sector’s first quartile for volatility but it’s fourth for maximum drawdown, which is 65.89 per cent compared with the sector’s 47.34 per cent.
However, it has made the highest capital return over the past two years at 24.71 per cent and it’s paid out £1,000 on the initial £10,000.
Income earned on £10,000 over 2yrs
Source: FE Analytics
Threadneedle UK Monthly Income has a 0.87 per cent clean OCF and yields 3.90 per cent, while Premier Monthly Income’s OCF is 0.91 per cent it yields 4.68 per cent. AXA Framlington Monthly Income’s clean OCF is 0.85 per cent and it’s yielding 3.79 per cent.
