Income Study MID-YEAR REVIEW 2014

Transcription

1 Income Study Maggie (Magdalena Maria) Laubser ( ), detail from Poplars, n.d. ( ), oil on cardboard, Sanlam Art Collection. MID-YEAR REVIEW 2014 by Paul Surguy Since our full year review in January there has been much for invesrs digest. An arctic winter and the withdrawal of quantitative easing in the United States, conflict in Ukraine, the wide sweeping vicry of eurosceptics at the European elections, and a power grab by extremists in Iraq have all tested the resilience of the strong equity market performance of the past year. Invesrs kept their nerve and sck markets in developed economies are now comfortably above where they started the year. Equity Income: The Ferrari of Pension Assets? Many private invesrs will have listened attentively the Chancellor s budget earlier this year as Individual Savings Accounts and pensions were overhauled. We used our last Income Study highlight the need for a growing income and the government s actions will now allow more choice in pursuing this goal. "New policy initiatives on pension provision will shake up the annuity market with individuals having far greater flexibility on how they manage their pension s savings in retirement." Martin Cholwill, Royal London From 2015, retiring individuals will have much greater freedom in choosing how they reap reward from their hard-earned retirement savings. Of course, there are naysayers who think that such a move will lead pensioners splashing their savings on a new Ferrari, rather than prudently securing their financial stability. At Sanlam, we are not ready invest in the shares of luxury car makers quite yet, as we believe that those wise enough save for their retirement will not squander their wealth so readily. My colleagues in financial planning inform me that if you do not require your income pass on a spouse after death or rise with the cost of living, and you are retiring at an advanced age, you could, even in fair health, get as much as 8,200* annual income on a 100,000 pot from an annuity. If, however, you are retiring young, wanting your income rise with inflation and be passed on your partner, the same pot may get you as little as 2,200** per annum, or 180 per month less than the amount you are likely spend on petrol if you were choose a Ferrari. The average income available from the funds included in this year s Income Study would provide just over 4,500, on a trailing basis, from that pot of 100,000. This is set rise, as equity dividends generally increase over time: according a recent report by Capita, UK dividends are expected rise by 5.4 this year. While a direct comparison is not wholly accurate due tax implications or potential fluctuations in capital value, it appears that some invesrs would be forgoing around half the income available them by being restricted annuities! While we have intentionally illustrated the extremes of the market, many retirees will actually obtain annuity rates similar, or possibly slightly higher, than the level of income equities could provide. But even at this level of income, equity income investing offers an attractive characteristic over other income-producing asset classes equities, unlike annuities, offer potential capital gains over time. Over the past five years, capital growth has constituted two thirds of UK sck market performance. Furthermore, as invesrs, we are acutely aware of the advantage of liquidity: the ability buy or sell quickly at close market price. In contrast annuity holders, equity invesrs can sell their holdings at short notice, or they can add or subtract smaller amounts as need dictates. The search for income continues Despite government debt having fallen in price, and equity scks having rewarded their holders very well in capital terms over the last year, remarkably, equities currently provide higher income than Gilts, as we highlighted in our Income Study last year. Given that the Bank of England s base rate remains at 0.5, and consumer price inflation sits at 1.5, cash offers little in the way of an alternative. In the current market, invesrs can have the potential upside of equities without sacrificing income. Readers may notice that a number of industry stalwarts are missing from this year s study; the multibillion pound Invesco Perpetual Income is perhaps the most notable absentee. These changes 1

2 are simply the result of a number of funds failing, or electing not, fulfil the requirements of the IMA (Investment Management Association) for membership of the 'Equity Income' secr, typically by not generating a high enough yield. By tying ourselves the secr as the starting point of our study, we ensure that all funds in the White List are committed generating a high income for invesrs and we make a point of avoiding any subjective assessment of a manager s mandate in our empirical MID-YEAR REVIEW 2014 (cont'd) The White List Specials study. The Income Study is not shrinking, however, as many new funds appear, having met the minimum size and performance hisry requirements. The net effect of these changes is that the number of funds covered remains broadly consistent and we ensure that all funds that find their way on the White List are adequate in size, have seen a suitably wide range of market conditions and satisfy the income generation requirements. *Male aged 75, non smoker, good health, single life, level annuity, 100,000 purchase amount. ** Male aged 55, non smoker, good health, 100 spouse pension, RPI escalation, 100,000 purchase amount Source: Avelo exchange. Quotes are indicative only Unicorn UK Income maintains its p slot following yet another strong period of performance. Sadly, the lead manager, John McClure passed away in June. However, he leaves two highly competent managers in charge. Simon Moon and Fraser MacKersie have learnt their craft from John and we believe they will continue produce solid risk-adjusted returns with their focus on smaller companies with strong cash flows and well covered dividends. Davids Horner and Taylor have also continued generate strong returns on PFS Chelvern UK Equity Income from their emphasis on smaller companies with high starting dividends. At our last meeting we were pleased hear that despite strong capital appreciation they maintain an unwavering desire continue produce a solid and growing income from their vehicle; after all, that is what it says on the tin! Royal London UK Equity Income has once again delivered exceptional returns. Martin Cholwill expects the mergers and acquisitions activity we have seen at the larger end of the market broaden out include his area of expertise, mid caps. Clive Beagles and James Lowen and their JOHCM UK Equity Income vehicle are becoming stalwarts of the White List. Despite forecasting weaker returns for the market through 2014, the team have generated a decent capital return and continue grow their dividend Inflation Sources of real income Real Yield Cash (Bank of England Base Rate) 10 Year Gilt Property Funds Income Study High Yield Bond Funds Strat Bond Funds Corporate Bond Funds Global Bond Funds Sources: the ONS, Bloomberg and Morningstar 2

3 The White List Specials (cont'd) Threadneedle are also consistently seen in the White List, with three funds: Threadneedle UK Equity Income, Threadneedle UK Equity Alpha Income and Threadneedle UK Monthly Income. Marrying economic analysis with company meetings and research is a skill not all can master; Leigh Harrison and Richard Colwell obviously can. We welcomed Standard Life UK Equity Income Unconstrained, managed by Thomas Moore, our specials in our last Income Study and it has not disappointed. An unconstrained approach has not led reduced income from the fund, which we applaud. Carl Stick, manager of Rathbone Income for almost fifteen years, has once again fared well. When making investments he prefers think of what can go wrong, rather than what can go well; this, along with a desire produce a growing income, has generated some great returns. Regular readers will note that Schroders have now completed their rebranding of Cazenove, with Matt Hudson s fund now having the moniker Schroder UK Alpha Income. Following a strong start 2014, we are pleased welcome Michael Clarke back the White List. His Fidelity MoneyBuilder Dividend fund has a rather simple investment style: SIRP, or safety of income at a reasonable price. For an equity income invesr, it is hard think of a better starting place. There is no secret formula the Income Study; we look at performance, income and volatility. And we search out those managers who have delivered the highest level of income, the best returns and have done so at a lower volatility than their peers. It is no accident that the average returns and income in the grey and black lists are lower. We maintain that, when the word income is applied a fund, or our Study, it should indicate an overriding emphasis on income delivery. As noted above, the IMA has removed a selection of funds from the income secr for not making the income target (funds have yield more than 110 of the All Share over three years, and cannot dip below 90 in any one given year) and we welcome this. "With a number of funds in the UK IMA Equity Income secr failing reach the required income threshold, I am even more focused on meeting these requirements and growing the dividend per share each year." Michael Clarke, Fidelity Whilst we remain strong proponents of equity income funds, at Sanlam we also offer full discretionary fund management services. Here, we can look further afield than just equity income, although it is true, certainly for our more income-orientated portfolios, that we, naturally draw on our significant experience in this area. As we can see from the chart on the previous page, which highlights the difference between asset class income-generation and the effect of inflation on these returns, a broader approach income generation could be beneficial. If you would like know more about discretionary fund management, including our range of income-generating portfolios which draw on fixed income, alternatives, property and equity funds, please feel free contact your local office for further information. The Grey List The Black List As markets ebb and flow, we often see changes in style in those funds that are performing well and those that are not. Two funds, Aviva Invesrs UK Equity Income and Troy Trojan Income, previously long-term members of the White List, sourced the majority of their opportunities in larger capitalisation scks, which have been less in vogue over recent years and hence we have seen them fall away in the Grey List. This could also be said of Artemis Income, which we mentioned in our previous review. It was recently announced that Bill Mott, manager of Psigma Income, will be retiring. In a 37-year career, Bill has both entertained invesrs and delivered some solid returns, we wish him all the best in his retirement. With over seven billion pounds of invesrs' money in the Black List, it often concerns us that invesrs will endure extended periods of underperformance. With both Scottish Widows funds permanently rooted the botm of this list, we wonder who can be left invested. Other candidates that worry us are Newn Higher Income, which has changed process once in the last eighteen months, and managers twice, also continues struggle. Ben Whitmore at Jupiter has also not managed turn the Income Trust around thus far. 3

4 Don't forget your NISA! Investing in the White List As opportunities reduce your tax bill become increasingly scarce, it becomes ever more important utilise your NISA allowance each year. For the current 2014/15 tax year, all invesrs can subscribe up 15,000 in a scks and shares NISA. For income tax, whilst all dividends are subject a 10 non-reclaimable rate, if you hold them within a NISA there is no further income tax pay. Outside a NISA they would be subject your p marginal rate of income tax. The upper rate of capital gains remains at 28, but investments held within a NISA wrapper remain exempt. An added benefit is the freedom switch the funds held in your NISA at any time, which gives you the opportunity follow future Income Study recommendations. Investing in the White List Portfolio NISA is the simplest way invest in the White List funds. This portfolio, which is actively managed by SPI, holds a selection of the best UK equity income funds which have featured in the Whist List. Once you have filled in the application form there is no more paperwork complete. We collect all the dividends for you and can pay them your bank account. However, many of our clients prefer use the Income Study assist in the selection of their own funds. If you would like details of any of our preferred funds, please get in uch. Remember, we are usually able offer very substantial purchase discounts the terms normally available private individuals. So, if you want make a new investment, take out a NISA or switch from an underperforming fund, dealing through SPI is simple and inexpensive: call us on We offer a personal service and do not have a call centre. THE W HITE LIST Past performance is not a reliable indicar of future results. Issued by Sanlam Private Investments (UK) Ltd 5 Miles s Buildings, George Street, Bath BA1 2QS I Tel: I Fax: Tel: +44 (0) I Fax: +44 (0) Registered office: 16 South Park, Sevenoaks, Kent, TN13 1AN enquiries@spi.sanlam.co.uk www. spi.sanlam.co.uk Sanlam Private Investments (UK) Ltd 1 Sanlam Private Investments Wealth Management (UK) Ltd 2 Trading as Sanlam Private Investments. Authorised and regulated by the Financial Conduct Authority. Registered in England and Wales ( , ). WEALTH MANAGEMENT I INVESTMENT MANAGEMENT I STOCKBROKING I OFFSHORE SERVICES BATH I HARROGATE I KIRKBY LONSDALE I LONDON I MARLOW I NEWCASTLE I SEVENOAKS

5 THE WHITE LIST Top fourteen funds by overall merit Net dividend yield Net income 5 years Total return capital growth and net income reinvested Volatility Fund (Based on 100 investment) 01/07/13 01/07/12 30/06/13 01/07/11 30/06/12 01/07/10 30/06/11 30/06/10 Unicorn UK Income PFS Chelvern UK Equity Income Royal London UK Equity Income JOHCM UK Equity income Threadneedle UK Equity Income Threadneedle UK Equity Alpha Income SLI UK Equity Income Unconstrained Threadneedle UK Monthly Income Schroder UK Alpha Income Rathbone Income RBS Equity Income Fidelity MoneyBuilder Dividend Premier Monthly Income Invesco Perpetual Income & Growth White List Average (See explanary notes and important information below). Notes: (a) (b) (c) (d) (e) Funds are ranked using seven different criteria based on performance, volatility and the income distributed, with the most recent period of performance receiving a greater weighting. All funds are in the IMA UK Equity Income secr. Performance data is provided by Morningstar on a bid--bid basis with net income reinvested. Volatility is based on five-year performance data. Income is calculated based on 100 invested five years ago. Yields sourced from Morningstar, FT and fund providers and represent the estimated annual pay out. Funds with a value of less than 20m are excluded. IMPORTANT INFORMATION All performance figures used in this document are provided by Morningstar and are quoted on a bid price bid price basis (mid mid for OEICs) ie ignoring initial charges, with net income (dividends) reinvested. Past performance is not a reliable indicar of future results. The value of unit trusts/oeics, and the income from them, can go down as well as up. You may not get back all that you originally invested, particularly in the case of early withdrawal. Invesrs may be subject an initial charge. Any tax reliefs referred are those currently available. Their value depends on the individual circumstances of the invesr. Levels and bases of, and reliefs from, taxation may change. The value of investments may also rise and fall purely as a result of exchange rate changes. In accordance with Financial Conduct Authority rule requirements, we have published a policy which sets out how we manage conflicts of interest. This policy is available on request from our Head of Compliance, or may be viewed on the Conditions section of our website: co.uk. This newsletter is based on information that we believe be reliable, but is not guaranteed as accuracy and completeness by Sanlam Private Investments (UK) Ltd. Recommendations for individual funds are necessarily made without taking in account readers specific circumstances and requirements and do not constitute investment advice under the Financial Services and Markets Act. Accordingly, readers may wish seek proper professional advice before acting on any information contained in this newsletter. Remember, the Income Study is not personal advice based on your circumstances or a recommendation. If you are unsure about the suitability of an investment for your circumstances please contact an FCA authorised financial adviser. 5

6 THE GREY LIST Net dividend yield Net income 5 years Total return capital growth and net income reinvested Volatility Fund (Based on 100 investment) 01/07/13 01/07/12 30/06/13 01/07/11 30/06/12 01/07/10 30/06/11 30/06/10 AXA Framlingn Monthly Income Franklin UK Equity Income Lazard Multicap UK Income Liontrust Macro Equity Income Old Mutual UK Equity Income St James's Place Allshare Income Premier Income Aberdeen UK Equity Income Allianz UK Equity Income Troy Trojan Income River & Mercantile UK Equity Income Aviva Invesrs UK Equity Income F&C Stewardship Income Artemis Income Fidelity Enhanced Income AXA Framlingn Equity Income Santander Equity Income AXA Framlingn Blue Chip Equity Income Rathbone Blue Chip Income & Growth NFU Mutual UK Equity Income Smith & Williamson UK Equity Income Trust PSigma Income Schroder Income Maximiser Schroder Income Grey List Average THE BLACK LIST Net dividend yield Net income 5 years Total return capital growth and net income reinvested Volatility Fund (Based on 100 investment) 01/07/13 Ignis UK Equity Income Newn Higher Income Jupiter Income Trust JPM UK Higher Income Neptune Income F&C UK Equity Income Kames UK Equity Income BlackRock UK Income SLI UK Equity High Income M&G Dividend Santander Enhanced Income CF Canlife UK Equity Income SWIP UK Income Scottish Widows UK Equity Income Black List Average /07/12 30/06/13 01/07/11 30/06/12 01/07/10 30/06/11 30/06/10 Past performance is not a reliable indicar of future results. 6 is