This article is part of our Guide to Maximising Your Pension, helping investors build up the maximum possible pension pot – and turn it into the maximum possible retirement income.
Emma Wall: Hello and welcome to the Morningstar Series 'Ask the Expert'. I'm Emma Wall and I'm joined today by Peter Brunt, Senior Analyst for Morningstar.
Hi Peter.
Peter Brunt: Hi.
Wall: So we have been running a Retirement Week, this week. And we have come to today which is post-retirement investing. And in post-retirement you are invariably looking for an income. Because you no longer have one from your job, but income of course is not just unique to the requirements of someone post-retirement.
It's something that everybody is after. And U.K. equity income is one of the most popular sectors for U.K. investors, better the devil you know.
But it is a very diverse sector. I have asked you today to pick out three funds to illustrate how diverse they are and how different methodology can produce different, but very exciting returns. So what's the first fund you would like to highlight?
Brunt: Sure just a bit of background, the sector requires the funds have 110% of the yield of FTSE All-Share, and so the three funds I picked today just showing the spread – they are all meeting that requirement – but just showing the spread amongst that.
So the first fund is the BlackRock U.K. Equity Income Fund. And that’s run by three managers. It’s a fund that we've recently brought into our coverage it’s a Bronze rated fund. The reason why we like it is BlackRock have a very strong U.K. equities team and they've had a bit of turnover over the years, but they've had more stability brought in. They had a new CIO bought in, Nigel Bolton a few years ago. He's brought the team into a lot more focus, a lot more communication among the analysts and the fund managers. It's still relatively early days but we like the team, we like the house, we like they finally have more focus.
Wall: And it’s a nice yield, as well isn’t it, 4.7.
Brunt: Absolutely.
Wall: In these days of extremely low inflation that’s actually very attractive.
Brunt: So they construct their portfolio with focusing on some high yielding, cash compound names. They complement that with some more growth orientated names. And some turnaround stocks which all of them will tend to yield, but not all of them will have a yield above the market.
Wall: What's the second fund you'd like to highlight today?
Brunt: So the second fund is the Fidelity MoneyBuilder Dividend. And this is run by Michael Clark, himself an experienced analyst and fund manager. He's been on the fund since 2008, since when he's got a good track record. This fund is a little bit more focused up the cap scale. It's looking at the more conservative, more defensive kind of steady-eddie names in the FTSE All-Share.
Wall: And these are ones that we have come to know as bond proxies, high yielding but not necessarily high growth.
Brunt: Absolutely yeah. So he's overweight pharma, utilities, he's got some insurance names in there which probably aren’t such bond proxies but the more steady high yielding names. And it performs as you would expect as a result in down markets it's very good at protecting your capital, doesn’t really partake in the sort of low quality rallies in 2009, for example.
Wall: And what's the third fund today.
Brunt: So the third fund is Standard Life U.K. Equity Income Unconstrained Fund. In contrast to the Fidelity fund it is really not looking at these higher yielding steady eddie bond proxies. He's really differently positioned to actually not only Fidelity but most of the peers in the peer group. It only holds I think four or five of the top held names in the peer group.
Wall: And that’s the unconstrained element, isn’t it?
Brunt: Absolutely yeah.
Wall: It's that all-cap unconstrained nature which of course can make for a less regular return stream as well, is this a more volatile fund.
Brunt: It is slightly more volatile but interestingly what's happened over the life of the fund thus far. He's been running it since the beginning of 2009 and the first few years, yes it was a lot more volatile than the benchmark and peers. But in 2011 the fund had a pretty bad year. It was very aggressively positioned probably a little bit further down the cap scale. But I think Thomas Moore has learned his lesson.
I think it was one of the biggest lessons he's learned managing money and he's now changed his approach to managing portfolio risk. He's looking more in absolute volatility now rather than relative to the benchmark. He's done a very good job of reducing that volatility. And for the past three years he's actually have got a lot of volatility than the benchmark. It’s one of the top performing funds in the sector and still gives a pretty decent yield, it's just about 4% at the moment.
Wall: Peter thank you very much.
Brunt: My pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
