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Five global funds to diversify your retirement income portfolio

23 February 2015

In the second of a two part series, FE Trustnet identifies global equity income funds that are suitable for investors in retirement, drawing on recommendations from industry experts.

By Joshua Ausden,

Head of FE Trustnet Content

Neil Woodford’s view that equity income funds should be the “natural home” for the majority of investors in retirement has gathered strong support from both industry commentators and our readers.

Global multi-asset income funds and structured products are being tipped as the most obvious replacement for annuities in the main, but higher life expectancy means that investors at 60 or even 65 have a time horizon of up to 20 years. Such a length of time means investors can afford to take on equity risk, though managers with a commitment to downside protection should be prioritised for obvious reasons.

With this in mind, FE Trustnet asked fund selectors to highlight UK equity income portfolios that tick the boxes for a retirement portfolio, which included the likes of Trojan Income and Rathbone Income.

While there’s no doubt that the FTSE All Share is home to a healthy number of internationally facing companies with established dividend records, most experts agree that investors need to look beyond the UK to ensure they are adequately diversified.

Here’s a selection of funds to give a UK-heavy retirement income portfolio some much needed diversification:




Global equity income funds

One fund that is grabbing the headlines for all the right reasons at the moment is Jacob de Tusch-Lec’s Artemis Global Income portfolio. Launched in July 2010, the fund has more than doubled investors’ money with returns of 103.64 per cent. This compares to between 66.52 and 64.73 per cent from its sector and benchmark respectively.

Performance of fund, sector and index since launch

 

Source: FE Analytics

De Tusch-Lec (pictured) targets a yield 10 per cent higher than the MSCI World index, searching for companies that display good prospects for dividend growth. Three of the experts FE Trustnet spoke to highlighted it as a fund suitable for retirement.

“This is an unconstrained fund seeking out the best income and growth opportunities from around the world,” said Parmenion’s Meera Hearnden.

“Cash flows are its primary focus and this is important for an income fund as dividends are paid out of cash, not earnings.”

The fund is not without its risks, however. Hearnden says that it should be viewed as a fund for total return and shouldn’t be relied on as a defensive income payer in isolation.

“The fund is managed with a total return mind-set, and volatility may at times be higher than its peers, but those investors that can take a longer time horizon would see that this volatility has been amply rewarded by exceptional performance.”

The need to generate capital growth in a retirement income portfolio is crucial, according to Chelsea Financial Services managing director Darius McDermott, making a manager like de Tusch-Lec perfectly suitable.

“Given that life expectancy is going up all the time you do need to keep some growth in your pension portfolio or you will end up drawing down the whole fund in income and maybe sooner than you think,” he said.

De Tusch-Lec is very sensitive to valuations and has the flexibility to invest in companies perceived to be of a lower quality than defensive blue chips. He has benefited from being invested in mid-cap cyclicals, for example, and told FE Trustnet in an interview last year that he was wary of what he deemed to be expensive dividend-paying blue chips.

Artemis Global Income has operated with a higher annualised volatility than its peers since inception, losing around 4 percentage points more in the down year of 2011. His strategy has yet to be tested in a crashing market akin to 2008, which could make some investors nervous.

For those who are at the later stages of their retirement and want something more reliable, Whitechurch’s Gavin Haynes recommends James Harries’ Newton Global Higher Income fund.

The £4.4bn fund is consistently the least volatile in the IA Global Equity Income sector and tends to outperform significantly when markets fall. Harries lost 16.94 per cent in 2008, for example, which compares to 18.42 per cent from the average global income fund and almost 30 per cent from the FTSE All Share.

Harries’ defensive stance led to a difficult period of performance in 2013, but over the long term the results have been compelling.

Performance of fund, sector and index since launch

 

Source: FE Analytics

Haynes says its risk profile makes the fund very attractive for investors looking for a “sleep well at night” product. He adds that it’s a particularly good option for those wanting to diversify away from the UK.

“The fund will seek equity income opportunities across all regions but only around 15 per cent will be held in the UK, providing low correlation with the UK stock market and a good diversifier for UK investors,” he said.

Newton Global Higher Income is currently yielding 3.42 per cent, compared to Artemis Global Income’s 3.4 per cent.

FE Research, who include the fund in the FE Select 100, says that it has a strong record of paying stable dividends, pointing out that the next payment is expected to be in line with expectations. The team highlighted the importance of a stable income stream in a study conducted by FE Trustnet last year.

Cost-conscious investors may wish to hold a tracker instead, or at the very least blend it with an actively managed fund. One of the most established global passive funds in the IA universe is the £1.7bn Vanguard FTSE Developed World ex UK Equity Index tracker.

As its name suggests, the fund is a good option for those wanting full diversification away from the UK, though it doesn’t give investors any exposure to emerging markets.

Like most Vanguard vehicles, the fund has a very low tracking error over the medium to long term, delivering returns of 74.32 per cent over five years. This compares to 79.23 per cent from the FTSE Developed ex UK index.

While the fund does hold many dividend-paying companies, the tracker doesn’t specifically focus on income however, and therefore should probably be avoided by investors who rely on a regular income stream. Vanguard FTSE Developed World ex UK Equity Index is currently yielding just under 2 per cent and only pays dividends once a year.

There are currently no income-focused global tracker funds on offer and only a handful of ETFs that specialise in the area.

One such example is the $258m Vanguard FTSE All-World High Dividend Yield UCITS ETF, which is domiciled in Ireland and yielding 3.8 per cent. Ongoing charges of 0.28 per cent will no doubt attract bargain hunters, but it has little track record to speak of and is only available on a few platforms. 

   
Country/region specific equity income funds

Investors who want to add an extra layer of diversification to their portfolio may also want to hold a country or region-specific equity income fund. As well as ensuring that your income stream is coming from as many sources as possible, funds that focus on Europe, North America and emerging markets also allow investors to benefit from valuation opportunities.

One area that many experts are tipping as being cheap at the moment is Europe. A recent FE Trustnet survey found that around one-third of financial advisers across the UK believe continental Europe will be the best performing equity market in 2015.

McDermott highlights Alice Gaskell’s £781m BlackRock Continental European Income fund as the ideal option. As well as being one of the few income-focused European portfolios with more than a three-year track record, he says the risk-return profile of the fund is perfect for an investor in retirement.

“BlackRock’s strong European team and the fund managers’ extensive experience combine to produce an impressive European income fund, which pays an above-average yield with below-average volatility,” he said.

“Also this fund has a hedged share class so you can buy it without currency exposure.”

Performance of fund, sector and index since launch

 

Source: FE Analytics

The fund, which is currently yielding 3.9 per cent, is a top quartile performer since its launch back in June 2011, delivering returns of 44.8 per cent. It’s been less volatile than both its sector and FTSE World Europe ex UK benchmark.

Gaskell and co-manager Andreas Zoellinger have 70 per cent in large caps and 30 per cent in mid-caps. Northern European companies dominate the portfolio, though the duo is overweight Italy and Portugal, which have a combined 13 per cent weighting.

Very few global equity income funds give investors significant exposure to emerging markets, as they have a much smaller universe of distinguished dividend-paying companies to choose from.

For retirement investors with an appetite for risk and a time horizon of 10 years or more, McDermott says one with a strong record of downside protection like Richard Sennitt’s Schroder Asian Income portfolio is appropriate, though recommends it should still only have a very small allocation.

“Sennitt’s experience, combined with the strength and depth of Schroders’ analyst team, make this fund stand out. This fund may add diversification to an income portfolio, but the fund as a standalone investment is more risky than most other equity income funds,” he said.

Returns vs volatility of Asia ex Japan funds over 5yrs

 

Source: FE Analytics

Schroder Asian Income has outperformed its IA Asia Pacific ex Japan sector average and MSCI Asia Pacific ex Japan benchmark over one, three, five and 10-year periods.

It has also consistently been one of the least volatile in the sector over these periods. Over five years, for example, the fund is only a touch more volatile than the FTSE All Share. A max drawdown of 15.37 per cent is actually lower than that achieved by the UK index.

Schroder Asian Income is yielding just over 4 per cent. Sennitt’s biggest regional weighting is to Hong Kong at 24 per cent, which gives him indirect exposure to fast growing economies such as China. China itself only makes up 9 per cent of assets. The manager has the flexibility to invest in the developed economy of Australia, which has a 22 per cent weighting.

 
FE Trustnet highlighted UK equity income funds that tick the boxes for investors in retirement in a previous article.

In the next article of the series, we’ll create and analyse a mock retirement income portfolio from the choices highlighted so far.

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