Research from The Share Centre shows that the average first-time buyer of a stocks and shares ISA is over 50, explaining the persisting popularity of income funds.
Such portfolios not only pay out a decent yield for anyone who needs it to live off, but are also more defensive in nature because they return chunks of capital to investors.
However, this year’s list of top sellers looks likely to be influenced by two major shifts in the market: the departure of FE Alpha Manager Neil Woodford from the helm of the Invesco Perpetual Income and High Income funds, and the growing appetite for global equity income funds.
UK equity income
Artemis Income, Threadneedle UK Equity Alpha Income and Unicorn UK Income are likely to be among the big winners from Woodford’s departure, according to Darius McDermott (pictured), managing director of Chelsea Financial Services and AFI panellist.
FE Alpha Manager Neil Woodford’s Invesco Perpetual Income and Invesco Perpetual High Income funds have been the most popular funds in the most popular sector for the past few years, but his resignation as manager means that many investors are looking for alternatives.Data from FE Analytics shows that all three funds have been among the best-sellers over the past six months, with Artemis taking in the most money of the three.
The £6.35bn Artemis fund, managed by Adrian Gosden and FE Alpha Manager Adrian Frost, is the most similar fund in its constitution to Woodford’s potrfolios, being invested heavily in defensive large caps.
Many other funds in the sector have been fishing in the mid and small cap part of the market to boost growth but the Artemis fund has stuck to its guns.
For this reason it is a sluggish performer relative to its sector average, but has retained strong support from its investors.
The fund has made 41.77 per cent over three years compared with a sector average of 41.46 per cent and slips into the third quartile, below the sector average, over five years.
It is yielding 3.8 per cent.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Threadneedle UK Alpha has performed much better recently and is a top-quartile performer over three years. It also yields 3.8 per cent.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
It is a more concentrated version of the larger Threadneedle UK Equity Income fund and holds just 34 stocks compared with the 51 in the other portfolio.
It has outperformed the less concentrated fund.
McDermott notes that Unicorn UK Income is gaining traction not only from income-seekers but also from investors looking for small cap funds.
There was a surge to get into FE Alpha Manager Paul Marriage’s Cazenove UK Smaller Companies fund before it hard-closed in January, McDermott says, and investors are now looking for an alternative.
Smaller companies funds have surged away from the market over the past year, as FE Trustnet recently highlighted, although the debate about when this will come to an end goes on.
Chris Mayo, investment director at Wellian Investment Solutions, thinks that Rathbone Income and Royal London Equity Income should also see strong inflows.
Our data suggests that the Royal London fund has been one of the top sellers over the past six months.
It is more of a mid cap focused fund and has been a consistent top performer in recent years as that part of the market has surged.
Global equity income
Global equity income funds actually outsold their UK counterparts in December once the sales of M&G Global Dividend were taken into account.
Both McDermott and Mayo say they expect M&G Global Dividend to continue to pick up new money.
The £8.9bn fund, run by FE Alpha Manager Stuart Rhodes, has taken in £1.2bn over the past six months alone, more than all but three portfolios.
This is despite sluggish performance that has seen it return only 6.51 per cent in the past year as the MSCI AC World benchmark has made 8.18 per cent.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
McDermott says that the fund suffered at the end of last year as investors looked for growth rather than defensive income stocks after the US Federal Reserve decided to taper quantitative easing.
Stephen Thornber, manager of the Threadneedle Global Equity Income fund explained to FE Trustnet yesterday how his fund had been affected by the same dynamic.
Smaller companies
The AFI panellist also thinks that smaller companies will see strong inflows off the back of the closure of the Cazenove fund and the surge in the sector’s performance.
However, he says he wouldn’t expect any single fund to appear in the top-five most-bought funds.
FE Alpha Manager Giles Hargreaves’ Marlborough Special Situations fund should see strong inflows, he says, as should Unicorn UK Income.
Cautious managed
Mayo adds that he expects funds in the old Cautious Managed sector, now renamed IMA Mixed Investment 20%-60% Shares, to see strong interest from people who want to invest smaller amounts or who prefer a one-stop shop.
The Jupiter Merlin range is likely to see strong inflows again, despite recent poor performance, which was down to its significant exposure to emerging markets.
Many of the funds in the sector target a yield, and Mayo says this should support investor interest, as traditional bond funds are less appealing this year.
