Multi-asset funds with an income focus have consistently outperformed their growth rivals over the short, medium and long term, according to FE Trustnet research.
Funds that prioritise dividends in IA Mixed Investment 0-35%, Mixed Investment 20-60% and Mixed Investment 40-85% have beaten their sector average over one-, three- and five-year periods, in some cases by more than 10 percentage points.
In the 40-85% sector, for example, the average income fund has returned 57.62 per cent over five years, compared to 46.72 per cent from the sector average. They’ve also been less volatile and have a lower max drawdown – 10.81 against 12.03 per cent.
Source: FE Analytics
Over the past three and five years, income funds come out on top versus their sector average by at least 4 percentage points in every case.
The study only included funds with a five-year track record. An income fund is defined as one that make direct reference to targeting dividends in its objective, as well as any currently yielding more than 3 per cent.
The degree of outperformance increases over longer time periods. Over a 10-year period, the average income fund in the 40-85% sector has outperformed by 27.46 percentage points.
Performance of income funds versus sector over 10yrs
Source: FE Analytics
Strong performers include Ecclesiastical Higher Income and Invesco Perpetual Managed Income, which have both outperformed their sectors over one, three, five and 10-year periods.
A big driver of income funds’ outperformance has been down to their superior showing in falling markets. For example, the average income fund in IA Mixed Investment 40-85% lost just 0.8 per cent in 2011, compared to a 5.51 per cent fall from the wider sector average. They also outperformed in 2008, albeit but a smaller margin.
Robin Hepworth’s Ecclesiastical Higher Income is a case in point. FE data shows that the fund lost 9 percentage points less than its peers in 2008 and was a top decile performer in 2011 as well.
Performance of funds and sector over 10yrs
Source: FE Analytics
Elsewhere, standout income-focused multi-asset funds include Invesco Perpetual Distribution, Jupiter Distribution and AXA Global Distribution.
Dividends help to smooth out the ride for investors, helping managers protect against the downside. Companies that pay a regular income tend to be of a higher quality than the average and often have defensive characteristics.
Ben Willis (pictured), head of research at Whitechurch, says he isn’t surprised by the superior performance of multi-asset income funds and expects the trend to carry on for the foreseeable future.
“Yielding assets have done very well since 2008, when emergency measures sent interest rates to record low,” he said. “There’s a big demand for getting income from investments and I can’t see that changing any time soon.”
A recent survey carried out by FE Trustnet found 91.4 per cent of financial advisers expect interest rates to be less than 0.75 per cent this time next year. Twenty-three per cent believe rates will stay at 0.5 per cent, or even drop.
Willis believes income-focused multi-asset funds should be considered by those in retirement looking for regular dividend payments, but also investors targeting total returns over the longer term.
Willis says that certain funds “kill two birds with one stone”, as they have characteristics that are attractive for both types of investor.
“These funds are still suitable for investors who don’t need income right away, so build it up over the long term and reap the rewards later on,” he explained.
“This doesn’t mean the funds need to be sold when they are in retirement, however. You can just flip the switch and hold the income shares instead.”
Recent pension reforms have increased the demand for funds that pay an income in retirement. From April 2015, anyone aged 55 or above can realise their defined contribution pension pot however they want, subject to their marginal rate of income tax in that year. Previously many people with defined contribution savings were effectively compelled to purchase an annuity.
The changes have led to a number of global multi-asset fund launches, which aim to deliver a diversified income steam to investors combined with capital growth. Examples include Schroder Global Multi Asset Income and Threadneedle Global Multi Asset Income, which have both been launched since George Osborne’s Budget back in March 2014.
FE Trustnet will be writing a number of articles on the subject in the coming weeks, including an article identifying the best global multi-asset income funds for retirees.