The environment of the last five years has been one of constant ups and downs, and anyone nearing retirement has had to tread a fine line between making sure they have built up enough of a nest-egg to get them through their twilight years without running the risk of seeing the value of their capital halve overnight.
So how can investors ensure they can maintain a sufficient level of income throughout various market conditions?
FE Trustnet looks at five funds that have withstood all the bumps and turns of the market cycle and continued to deliver on their income objectives.
Freehold Income Authorised
Few funds can boast the kind of income growth that Freehold Income Authorised has demonstrated over the last two decades.
The £156m fund, managed by Nigel Ashfield, has a 19-year track record of inflation-beating annual returns.
Performance of fund vs index over 16 years
Source: FE Analytics
The chart contains information from the start of FE data.
Regardless of market conditions, Freehold Income has continued to deliver steady returns of roughly 5 to 10 per cent over the last 10 calendar years. Even in 2008 when the majority of funds were bleeding capital, Freehold Income returned 5.92 per cent.
The fund aims to provide a secure, stable investment income through acquiring freehold ground rents. It targets an annual 4.25 per cent income yield in addition to capital growth.
The fund requires a minimum investment of £5,000 and has a total expense ratio (TER) of 1.45 per cent. However, it is only possible to gain access to it through an industry professional because the manager wants to ensure investors understand how the fund works before they commit their money.
Merchants Trust
Hargreaves Lansdown’s Richard Troue says investment trusts have an inherent advantage when it comes to delivering steady and growing yields because they are able to hold back up to 15 per cent of their dividend in a given year and spread it out over time.
"In terms of being able to pay a consistent dividend and income, investment trusts are at a bit of an advantage because they can build up a reserve to smooth flows over the years," he said. Troue (pictured) points out that this allows them to increase their dividend even in difficult years, and says a trust with one of the longest track records of doing this, for more than 30 consecutive years, is the Merchants Trust, run by Allianz’s Simon Gergel.
The trust has an attractive dividend yield of 4.8 per cent and is trading on a slight discount of 1.3 per cent.
While the trust has not shot the lights out in the long-term, it has consistently beaten both the IT UK Growth & Income sector and FTSE 100 index over one, three, and five years, and performed in line with the sector over 10.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
However, Troue says investors need to be aware the trust has a relatively high proportion of structural gearing, which can make it expensive and create a high hurdle to entry. It is geared at 19 per cent.
It has ongoing charges of just 0.66 per cent.
City of London IT
As the oldest investment trust in the UK, it perhaps does not come as a surprise that the City of London IT also has the longest track record of consecutive years of dividend increases – nearly half a century.
Troue says the current manager, Job Curtis of Henderson Global Investors, has done a "good job of continuing the fund’s exemplary record of dividend growth" since taking over in 1991.
"Curtis can invest across the UK stock market, including in higher-risk smaller companies, but tends to have a bias towards larger companies," he added.
"He has maintained a consistent approach since taking over as manager. He looks for companies offering an attractive dividend yield, robust balance sheets and strong cash generation. He also likes businesses with assets, whether tangible, such as a property portfolio, or intangible, such as brand."
"He generally aims to avoid overly indebted businesses and as well as drilling down into a company’s finances, will assess its competitive position and quality of management. This is an approach I like and this could be an option for those seeking a steadily rising income with the potential for some capital growth."
The £1bn, five crown-rated trust is yielding 3.9 per cent and is trading on a premium of 2.1 per cent. It is 8 per cent geared.
It has consistently outperformed the IT Growth & Income sector over three, five and 10 years, but underperformed it over the last 12 months.
Over the last decade, the trust has returned 196.72 per cent compared with 166.33 per cent from the sector.
Performance of trust vs sector over 10yrs
Source: FE Analytics
The trust has ongoing charges of just 0.45 per cent, making it much less expensive than many open-ended alternatives.
Caledonia Investments
Another trust Troue likes for its income potential is the £1.3bn Caledonia Investments, headed up by Will Wyatt.
It is one of the few income-focused trusts in the IT universe currently trading on a discount, of 17.1 per cent, meaning investors can gain access to it for less that the value of its underlying assets.
It has a dividend yield of 2.5 per cent and no gearing.
While the trust has underperformed over the medium-term, it has been one of the best performers in the IT Global Growth sector over the last 12 months and delivered strong returns over the last 10 years.
Over one year, the trust has gained 35.94 per cent while the sector has made 23.94 per cent. It has also beaten its benchmark, the FTSE All Share, which made 23.67 per cent.
Performance of trust vs sector and index over 1yr
Source: FE Analytics
The trust has ongoing charges of 1.01 per cent.
Invesco Perpetual High Income
Troue says that although the vast majority of open-ended funds were caught out by companies slashing their dividends after the financial crisis, no-one can argue with the long-term track record of Neil Woodford.
"In 2009 and 2010, a lot of underlying companies cut their dividend so you did see a slight drop of dividend payments there," he said.
"But the longest track record out there is Neil Woodford at Invesco Perpetual. If investors had stuck with him [over 25 years], they would have seen a very good rise in income payments over that period."
The five crown-rated fund is yielding 3.28 per cent and has beaten the IMA UK Equity Income sector over three, five and 10 years.
Over the last 24 years, the fund has made 1,601.17 per cent, smashing the returns of the sector, which picked up just 557.48 per cent, according to FE Analytics.
Performance of fund vs sector since 1989
Source: FE Analytics
Due to the large size of the portfolio – £13.9bn – Woodford invests in many of the UK’s largest and most liquid income-paying companies, such as AstraZeneca, GlaxoSmithKline and British American Tobacco.
It requires a minimum investment of £500 and has ongoing charges of 1.69 per cent.
