A huge number of pension investors select the default option recommended by their provider, whether it be an actively managed fund or a tracker. While these tend to be offered at a discount, and some have performed strongly, there are a number of alternatives for those who want to take control of their income in retirement.
Investors don’t have to use a SIPP to get exposure to these funds; many pension providers offer out-of-house options on their platform.
Here is a selection you may wish to consider:
Traditionally, the default option offered by a pension provider is either an actively managed UK equity fund or a FTSE tracker. However, among the IMA UK All Companies, UK Equity Income and UK Smaller Companies sectors, there are some very appealing options.
For everyday investors, Neil Woodford’s Invesco Perpetual High Income
fund needs no introduction, but for most of those with a pension, this portfolio is an unknown entity.
The fund is the classic long-term core holding – one that has gone through periods of underperformance, but that has come up trumps time and time again. In spite of severe underperformance in 2009 and 2010, the fund is the best-performing UK Equity Income portfolio of the last decade, with returns of 123.19 per cent.
This compares with 65.07 per cent from the FTSE All Share, 47.74 per cent from Aviva UK Index Tracking
, and just 26.09 per cent from the £3.5bn Halifax UK Growth fund.
Performance of funds vs index over 10-yrs
Source: FE Analytics
Woodford’s focus on large cap dividend payers has ensured that the fund is also consistently less volatile than its FTSE All Share benchmark.
Unfortunately, due to the popularity of Woodford’s £12bn portfolio – one of the largest in the entire IMA unit trust and OEIC universe – investors often have to pay a premium for holding this fund in their pension plan. Skandia, Aviva and Canlife are among those that hold Invesco Perpetual High Income on their platform.
UK small cap
For anyone that is new to employment and just starting their pension, or that has a higher risk profile, the five-crown rated Fidelity UK Smaller Companies
fund may be of interest.
While the £25m portfolio is not as established as many of its competitors, it has turned heads of late, prompting Skandia to add it to its platform in August last year.
The fund, which is headed up by FE Alpha Manager Alex Wright
, is the second-best performing vehicle in the entire IMA unit trust and OEIC universe over three years, with returns of 140.16 per cent.
While small caps are traditionally more volatile than larger caps, historically they tend to outperform in the long-term. If Wright manages to build on his impressive start as manager, this could be a very attractive long-term option.
Many pension plans dedicate a hefty portion of their assets to gilts, which have traditionally been viewed as a safe haven investment. However, with yields at all-time lows, many fear that pensions with a high exposure to these instruments could be in for a tough time when prices normalise.
Strategic bond funds allow managers the freedom to hold gilts, investment grade corporates, high yield bonds, and in some cases even equities.
FE Alpha Manager Richard Woolnough’s M&G Optimal Income
portfolio has been a favourite for a huge number of investors in recent months. According to FE data, the fund has experienced inflows exceeding £2.7bn in the last year, sending assets under management (AUM) to £6.9bn. It is little wonder, given the reputation of Woolnough and the M&G fixed interest team in general, as well as the fund’s record since launch in December 2006.
Performance of fund since launch vs sector
Source: FE Analytics
According to FE data, M&G Optimal Income has returned 55.29 per cent over this period, compared with 19.56 per cent from its sector average.
Many pensions were started before emerging markets were considered as a mainstream investment. These days, however, the growth potential of countries such as China, Brazil and India is hard to ignore.
First State Global Emerging Market Leaders
is one of the few five-crown rated funds that is still open to new money. The portfolio has returned 101 per cent since Jonathan Asante
took over as lead manager in March 2003 – more than 40 per cent more than its MSCI Emerging Markets benchmark.
The £2.14bn fund is also one of the least volatile emerging market portfolios during this time, which is reflected in its FE Risk Score of just 86. According to FE analysis, this makes it a less risky investment than the FTSE 100.
Among the IMA Global Emerging Market and Asia Pacific ex Japan sectors, only the offshore-domiciled Aberdeen Global Asian Smaller Companies fund has returned more since Asante took over, with significantly more volatility.
First State Global Emerging Market Leaders is a top-quartile performer over one- and three-year periods as well.
Like all of First State's emerging market portfolios, Asante’s fund is cautiously managed, aiming to outperform its benchmark during down-markets and provide competitive returns during up-periods.
The fund, which also has FE Alpha Manager Glen Finegan
on the team, is available on a number of pension platforms, including Pru, AXA Life, Aviva and Standard Life.