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Why income matters and why you need to spread your investments
Thursday 11 Jun 2020 Author: Ian Conway

If you’ve recently retired, congratulations. After a lifetime of work, you can finally enjoy the fruits of your labour, including that pension pot which has been building up month after month, year after year, waiting for just this moment.

Historically most of us would have used this sum of money to purchase an annuity, offering a guaranteed income through the course of our retirement.

However, with annuity rates extremely low and greater flexibility now available to you, many are taking control of their own destiny and remaining invested in retirement.

In this article and with the help of AJ Bell’s head of active portfolios Ryan Hughes we have identified four funds tailored to someone in retirement.

You may be lucky and have a big enough pot that you can use the regular dividends you receive on your investments to pay the bills and get by on, thereby leaving your capital untouched.

Indeed, some people have even structured their investments so that every month or every quarter they receive enough in dividends to pay that month’s or that quarter’s bills.

In the short term income may be disrupted by the coronavirus crisis
and many of us will also need to dip into our pensions, taking out a set amount each year.

How much we take has a direct effect on both how long the pot lasts and how much it grows in the meantime.


As you can’t rely on the market going up indefinitely, capital gains aren’t going to do all the ‘heavy lifting’ for you in retirement.

You also need to hold a range of income generating assets so that with luck you can match what you take out each year with what you receive in income payments.

If for example you have a pot worth £500,000 and you want to take out £15,000 or 3% each year, in order not to run down your capital you’ll need to earn slightly more than 3% – net of tax, and assuming that your pot hasn’t increased in value – to keep your pot from going down.

Clearly with so many firms having chosen not pay dividends this year in order to conserve cash, finding a reliable source of income isn’t going to be easy.

One thing to look for is firms or funds which have a strategy built on the sustainability of dividends rather than just targeting a higher yield which is potentially more risky.


You obviously wouldn’t put all of your money into a single fund or stock.

If you put all of your eggs in one basket and the unthinkable happens, you could lose far more in capital than you are earning in income so including a range of income-paying assets as part of a diversified portfolio is a more sensible approach.

To help you with the process of building that portfolio we have identified the quartet of funds discussed.

Artemis Strategic Bond Fund (BJT0KT2) 70.5p

AJ Bell head of active portfolios Ryan Hughes says: 

James Foster has a long pedigree of investing in fixed interest and this fund has the flexibility to invest right across the range of fixed interest from government bonds to high yield. The fund has the option of either monthly or quarterly income making it well suited for income seekers while the flexibility in the approach makes it a long term holding as it can adjust to the prevailing market conditions.

This £1.7bn fund aims to provide a combination of income and capital growth over rolling five-year periods. The managers James Foster and Alex Ralph have nearly 40 years’ combined experience managing bond funds.

The duo have a flexible investment approach which means they aim to preserve capital in tough times and seek to profit from favourable conditions. They achieve this by shifting between different types of bonds as the economic cycle turns and market conditions change.

The broad experience of the team and the flexibility to capture income from all areas of the global bond markets and from different economic conditions make this a good fund to consider for retirement income. The dividend is paid quarterly which is an advantage for investors looking for products which deliver a more frequent income.

Typically the fund has around 130 bond holdings diversified across different sectors of the economy and different credit ratings of bond issuers. This allows the managers to hold riskier, but higher yielding non-investment grade debt as well as safer high grade corporate and government debt.

Recently the managers have purchased a range of new issues in the investment grade market and a few high-yield issues across a broad range of companies including Tesco (TSCO), Pepsi and Royal Dutch Shell (RDSB).

The funds’ holding in investment grade bonds has increased to 40%, while high-yield has gone up to 28%, with government bonds now at 30%.

The fund has a good long-term track record and has delivered average annual returns of 3.98% over the last five years, a considerably better result than with the 1.4% return of the Morningstar Flexible Bond category.


Fidelity Special Values (FSV) 194p

Described as contrarian, the fund invests in ‘unloved companies with potential for positive change’. It typically has a bias towards medium and small-cap companies and value, but steers clear ‘deep value’ or recovery situations which are inherently higher risk.

 AJ Bell head of active portfolios Ryan Hughes says:

In retirement, it’s not only about generating income, some growth is need too to help sustain the capital value of the pot. Fidelity Special Values is a core growth investment trust, managed by Alex Wright with the supported of Fidelity’s extensive team of analysts. The trust is value tilted so looks different to the index and will result in periods of underperformance but in the long run, a focus on those businesses which are fundamentally cheap but unloved should be a strong combination.

Historic performance has been extremely strong thanks to the fund’s ability to maximise gains on its winning positions and minimise losses.

Lead manager Alex Wright is a Fidelity veteran, having begun his career as an analyst in 2001, moving on to manage smaller funds from 2008 and taking the lead role at Special Values in January 2014. Wright also manages Fidelity Special Situations (B88V3X4).

Co-manager Jonathan Winton, who was appointed in February this year, is another long-time Fidelity alumnus having been an analyst and fund manager since 2005.

The fund takes a three-stage approach to investing. To begin with it looks for signs of change in companies which are out of favour with the market.

Change could either be internal, such as restructuring or the appointment of new management, or external such as a shift in the competitive or regulatory outlook. Examples of companies in this first stage include publisher Pearson (PSON).

Once the market begins to recognise that change is under way and the shares start to re-rate, the managers let the stocks be. Stocks in this stage include  outsourcer Serco (SRP).

When change is fully priced in, the fund looks to exit the holdings. Current examples include defence firm Ultra Electronics (ULE).

With value as a strategy currently at a historically wide discount to growth, the fund is finding plenty of fresh names to buy at attractive prices although Wright believes it is too early to be aggressively positioned.


TB Evenlode Global Income (BF1QMV6) 331.4p

Someone in retirement would want the income they get from their investments to be as reliable as possible. The focus of TB Evenlode Global Income (BF1QMV6) on quality companies should help deliver that, even if income may be reduced in the short term by the coronavirus crisis.

AJ Bell head of active portfolios Ryan Hughes says: 

Evenlode has a focus on high quality companies that can grow sustainably over the long term.

Through this sustainable growth, the companies should then be able to pay growing dividends over time, helping to compound long-term capital growth. While the trade-off for this sustainability of income may be a lower yield, the potential consistency in the payments should make up for this. 

The strategy of the fund is to invest in global businesses capable of delivering the growth in earnings and cash flow required to underpin a progressive dividend.

The company looks to hold on to stocks for the long term and there is a bias towards larger companies. Managers Ben Peters and Chris Elliott have managed the fund since its inception in 2017.

Although this is a limited track record on which to judge the fund, it is leaning heavily on the approach that has proved successful for UK-focused TB Evenlode Income (BD0B7D5) and then using it to find companies globally. The latter has consistently outstripped its benchmark.

On a cumulative basis the global fund is up 19.2% since launch against 11% for its identified benchmark – MSCI World (with net dividends reinvested).

In commentary published in April, Elliott and the Evenlode team noted examples of businesses in the portfolio which were good corporate citizens in the early stages of the pandemic.

‘To put it simply, our view is that the “right thing” is most often the “profitable thing” in the long term,’ they said.

‘At Evenlode we continue to carefully monitor the actions of the companies in our investable universe and we fully support the good that they are doing in times of crisis.’

Well-known names in the portfolio include Unilever (ULVR), Reckitt Benckiser (RB.) as well as chip manufacturer Intel and online marketplace eBay.

In May the company took a position in medical equipment maker Siemens Healthineers – a world leader in imaging and testing equipment with strong positions in areas like X-ray and CT scans.

DISCLAIMER: Editor Daniel Coatsworth has a personal investment in Evenlode Income and Evenlode Global Income.


Troy Income & Growth (TIGT) 74p

If you’re trying to achieve an attractive dividend yield, with the prospect of some capital growth, then we think Troy Income & Growth (TGIT) could be a good option over the course of your retirement.

AJ Bell head of active portfolios Ryan Hughes says:

Troy have a core UK equity exposure with a real thought to managing downside risk through a focus on high quality businesses that can generate cash. 

This approach makes it a great core holding and should provide some downside protection if things get a little tricky. With a quarterly dividend, it is well placed for income seekers while an experienced team of three portfolio managers ensure that fund is positioned appropriately for what is happening in the market and economy.

A rejig of its portfolio last year, selling out of high yielding stocks with question marks over the sustainability of the dividend and into more solid companies with strong dividend cover and potential for growth, seems to have been particularly well-timed given the coronavirus crisis.

Troy Income & Growth has already said it will maintain the dividend at the current quarterly rate of 0.695p for the current financial year to 30 September 2020, but will rebase it from that point.

As far as capital growth goes, performance has been steady with the trust five year annualised growth of 3.55% in its share price, with its net asset value rising an annualised 4.14% over five years.

We like the trust as we think it should be a good long-term option for income investors, and its new approach under managers Francis Brooke and Hugo Ure should enable to increase shareholder returns over time.

The signs were encouraging before the market selloff, with its share price rising from around 73p in the start of 2019 up to 86.4p on 21 February this year.

Its top holdings include consumer goods giant Unilever (ULVR.).

Another core holding is Reckitt Benckiser (RB.), which has come out of the coronavirus crash in a stronger position, along with pharma stocks AstraZeneca (AZN) and GlaxoSmithKline (GSK) and utility play National Grid (NG.).

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