Investors drawing down their pension only have selected exposure to growth stocks and in general they are sticking to income-generating shares and funds. This is according to analysis of AJ Bell’s customer holdings by Shares.

Many people are living for longer and are keeping their pension invested in the market in the hope of achieving capital growth as well as income. Based on AJ Bell’s customer behaviour this doesn’t extend to putting money into overseas listed stocks such as Tesla (TSLA:NASDAQ) and Apple (AAPL:NASDAQ) which are far more popular among investors who are still building up wealth in their pension.

Instead, FTSE 100 companies are among the preferred ways to maintain exposure to the market for people in drawdown. This can be explained by the index featuring many generous dividend payers, as evidenced by the likes of Lloyds (LLOY), Shell (SHEL) and BP (BP.) being among the top holdings for AJ Bell customers already dipping into their pension pot.

EXPOSURE TO RISKIER INVESTMENTS

What might come as a surprise is the popularity of Scottish Mortgage Investment Trust (SMT) among people taking money from their pension to pay the bills. It’s the top holding for AJ Bell SIPPs (self-invested personal pensions) by number of customers, across both those taking money out of their pot and those who are not yet in drawdown.

It means a lot of people in retirement are exposed to an investment vehicle that has higher risk holdings. Scottish Mortgage aims to invest in the big companies of tomorrow and isn’t afraid to hold stocks that trade on high valuations. It also has large exposure to privately-owned businesses.

Fundsmith Equity Fund (B41YBW7) is also a popular holding for SIPP holders across both those in drawdown and those who are not. The Terry Smith-run collective invests in what it calls ‘quality growth’ companies. These are typically more profitable businesses than a lot of the holdings you’d find in Scottish Mortgage.

As both funds pay a tiny dividend, it seems as if investors in drawdown are attracted principally to their growth potential. Smith has previously argued that anyone holding his fund who wants to generate an income should simply sell some of the units to raise some cash.

NO SURPRISE TO SEE A RELIABLE INCOME PAYER

Less surprising is the popularity of City of London Investment Trust (CTY) among people in drawdown. It invests principally in large UK-listed companies and a 4.7% yield is likely to be the key attraction for many retirees. That and the fact it has raised its dividend every year since 1966, suggesting that many investors view it as one way to obtain a growing stream of income.

Vanguard’s LifeStrategy fund range has proved a big hit among investors still in the accumulation phase of their life, with many AJ Bell SIPP customers holding the 80% and 100% equity versions. But that popularity doesn’t translate to those already drawing down their pension.

A traditional asset allocation model for investors has been to hold 60% of a portfolio in equities and 40% in bonds. This is the structure of Vanguard LifeStrategy 60% (B3TYHH9), yet this fund is way down the list in terms of popularity for AJ Bell customers in drawdown. Even the idea that one seeks a greater weighting to bonds in retirement isn’t reflected in the product choices, with Vanguard LifeStrategy 40% – being split 40% equities, 60% bonds – is even less popular when looking at the AJ Bell customer holdings.

TRACKER FUNDS A DEFAULT CHOICE

Tracker funds are the default choice for many investors, particularly those seeking an easy way to get exposure to markets around the world. That might explain why so many AJ Bell SIPP customers not yet in drawdown hold such funds as iShares Core FTSE 100 ETF (ISF) and Fidelity Index World (BJS8SJ3). However, this broad approach doesn’t feature as much in the portfolios of investors already taking money out of their pension. In general, these types of customers appear to prefer individual stocks or investment trusts/funds that have a certain style or approach. For purposes of this article, we have excluded AJ Bell’s own fund range from the analysis of customer holdings.

When looking at the broader investment trust and fund holdings, those leaning on their pension in retirement are more likely to hold something run by a well-known fund manager such as the Nick Train-managed Finsbury Growth & Income Trust (FGT) or a specialist in a certain part of the market like HICL Infrastructure (HICL).

DISCLAIMER: AJ Bell owns Shares magazine. The author owns shares and fund units in AJ Bell, Fidelity Index World and Fundsmith Equity Fund. Tom Sieber who edited this article owns shares in AJ Bell.

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