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Five UK equity income funds for a retirement portfolio

18 February 2015

In the first of a three-part series, FE Trustnet asks industry experts to highlight a selection of UK equity income funds that tick the boxes for investors in retirement.

By Joshua Ausden,

Head of FE Trustnet Content

Neil Woodford and a number of other industry experts argue that many investors place too much emphasis on capital protection when they retire, arguing that equities should be the natural home for those with a 10 to 15-year-plus time horizon.

Annuities have long been the default option for investors who require a regular income stream, but the reforms set to kick in later this year will give investors far greater flexibility. Multi-asset income funds with a diversified income stream have been tipped as a natural replacement, though the likes of Parmenion’s Meera Hearnden argue investors at 65 or even 70 can afford to take on more risk.

“Neil Woodford (pictured) is not alone in sharing this view that equity income can be a natural home for retirement investors. Indeed, people now live longer and gone are the days that asset allocations need to be rigidly changed from equities to more cautious assets by the age of 65,” she said.

“Equity income can give retirement investors the twin objective of additional income in retirement as well as prospects for capital growth.”

With this in mind, and in the first of a three-part series, FE Trustnet highlights a selection of IA UK Equity Income funds that investors may wish to consider if they are building an equity income portfolio in retirement. Part two will focus on global and regional equity income funds that ensure investors are adequately diversified.

While Hearnden thinks equity income funds are good options for retirement investors, she warns they are not suitable for those who are risk averse and particularly those with a short-term time horizon.

Even for longer-term investors, she says managers with a keen eye on capital protection should be high in demand and for that reason highlights Francis Brooke’s Trojan Income fund as an ideal choice.

“This is a naturally defensive fund with an inherent focus on capital preservation, making it an excellent option for retirement investors who are conscious of equity market volatility,” she explained.

“Indeed it is among the least volatile funds in its sector since launch. The fund has delivered a growing income averaging around 5 per cent over the last 10 years, and when combined with capital growth, the fund has delivered excellent long-term returns.”

FE data shows Trojan Income has been the least volatile member of the IA UK Equity Income sector over the past decade and has also outperformed its FTSE All Share benchmark over the period with returns of over 150 per cent.

Returns vs volatility of UK equity income funds over 10yrs



Source: FE Analytics

The fund has also been less volatile than Invesco Perpetual Income and High Income, which currently reside in the IA UK All Companies sector even though they are natural rivals to Troy.


From a capital growth point of view, Brooke (pictured) lost just over 12 per cent in 2008 – 20 percentage points less than the All Share. Trojan Income tends to underperform in fast rising markets, but its ability to protect on the downside has seen it outperform over the long term.

This, combined with his focus on quality companies with strong balance sheets, predictable earnings and a strong dividend record, has given Brooke a good platform to grow income year-on-year. FE Trustnet recently highlighted Trojan Income as one of the few UK equity income funds that hasn’t cut its dividend in recent years.

UK equity income funds with a similar focus on high quality large cap dividend-payers include Fidelity Moneybuilder Dividend, Threadneedle UK Equity Income, Franklin UK Equity Income, CF Woodford Equity Income and Invesco Perpetual High Income.

While the likes of Brooke and Woodford have excellent track records, experts agree that it’s wise to diversify your assets across more than one fund. As well as protecting against management risk, it’s also crucial to protect against style risk, which means gaining access to funds that focus on different areas of the FTSE All Share.

The quality blue chips that dominate Trojan Income and CF Woodford Equity Income have served investors well in recent years, but there’s always the chance that they go out of fashion or even enter bubble territory.

Looking outside of the core large cap funds, Gavin Haynes, managing director of Whitechurch Securities, likes Carl Stick’s Rathbone Income portfolio.

Stick has a keen focus on downside protection, though is more prepared to venture down the market cap spectrum to find opportunities compared to Brooke. The fund has 50 per cent of its assets in the FTSE 100 and 27 per cent in the FTSE 250, with the rest split between small caps, international companies and cash.

The manager had a tough time in 2008, losing more than the FTSE All Share over the course of the calendar year. He has since expressed his regret at having too much exposure to cyclical companies, and has since performed much better in down markets.

“This is a traditional equity income fund that invests in a portfolio of around 50-70 companies that provide above average and increasing income,” said Haynes.

Performance of funds and index over 5yrs



Source: FE Analytics

“Stick invests in companies where the management is committed to increasing dividends without penalising capital growth. The fund has a strong record of rising annual distributions.”

“The fund has one of the best risk-adjusted return numbers in the sector and I believe that it is a good choice for long-term UK equity income exposure.”

Darius McDermott, managing director of Chelsea Financial Services, prefers the ever dependable Martin Cholwill and his Royal London UK Equity Income portfolio. The fund has been the most consistent in the sector in recent years, beating his peer group in the last nine consecutive calendar years, and unsurprisingly in a top quartile performer over the medium to long term.

“This high conviction fund invests across a broad spectrum of industries in which Cholwell is able to identify value, in particular focusing on companies with attractive cashflow characteristics,” said McDermott.


“This is important when identifying those companies that can consistently support a growing and sustainable dividend, as it is cashflow, not ‘cashless’ profits, that pays the dividend and funds investment for future growth.”

Like Stick, Cholwill ventures down the market spectrum to find opportunities, though currently views large caps as being more attractive from a valuations point of view. He recently told FE Trustnet that he was backing mega caps BP and Shell in light of the plummeting oil price, for example.

For those keen to keep down their costs, Hearnden also highlights a tracker as a possible option, highlighting the Vanguard FTSE UK Equity Income Index as her favourite.

“Passive funds may not be everyone’s cup of tea, but this fund can have a place in a retirement portfolio for investors looking to get equity market type returns to help boost their capital, without paying too much for it, while earning an attractive income,” she said.

“The OCF [ongoing charges figure] on the retail share class is only 0.22 per cent and the historic yield of 4.18 per cent makes this an attractive proposition.”

FE data shows the Vanguard fund has a tracking error of less than 1 per cent over five years in relation to its FTSE UK Equity Income benchmark. Interestingly, a return of 82.12 per cent over the period puts it comfortably in the second quartile of the IA UK Equity Income sector, even though it’s a passive vehicle.

Lee Robertson, chief executive of Investment Quorum, also think trackers are an effective, no-nonsense option for retirement investors who want exposure to the UK’s biggest dividend-paying companies. He highlights the iShares UK Dividend ETF, which has ongoing charges of 0.4 per cent.

Haynes’ colleague Ben Willis, who heads up the research team at Whitechurch, thinks equity income funds that use derivatives to enhance their yield are likely to be high in demand for some investors in retirement.

Products such as Schroder Income Maximiser and Fidelity Enhanced Income use call options, which allow them to capture higher levels of income at the expense of capital growth. Click here for more detail about how these funds work.

Willis likes the Schroder Income Maximiser fund, not least because it’s delivered more income to investors than any other in its sector in recent years. FE data shows an initial £1,000 investment has resulted in dividends of £439.07 over a five-year period – almost £90 more than Fidelity Enhanced Income.

Income earned from funds over 5yrs



Source: FE Analytics

It’s even further ahead than more mainstream vehicles such as Trojan Income, though it’s important to point out that this fund is due an income payment and will therefore close the gap on its rival.

Willis points out that while these funds look to maximise income over the medium to long-term, they are prone to dividend cuts, which investors who rely on dividends on a regular basis should keep in mind.


While Thomas See implements the call options, the stocks in Schroder Income Maximiser are picked by deep value managers Nick Kirrage and Kevin Murphy, who target unloved stocks whose earnings potential are underestimated by the market.

This focus means it tends to be more prone to capital losses than Fidelity Enhanced Income, which has been one of the least volatile in the sector since it was launched in 2009.

The FTSE All Share is home to some of the most established dividend payers in the world, and more often than not gives investors exposure to international markets as well as the UK.

However, even if you’re invested in a basket of UK Equity Income funds, all of the experts above believe it pays to be globally diversified – especially if you’re dependant on a regular income stream in retirement.

With this in mind, FE Trustnet will highlight a selection of global and region/country-specific funds in an upcoming article. In the third article in the series, FE Trustnet will construct and analyse a model globally diversified portfolio of equity income funds.

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