Retired investor Michael Abbotts says his portfolio of equity income funds has provided a vital lifeline for him and his wife.
Abbots retired from the ship-building and ship maintenance sector in 1996 when he was in his early 50s. At this age, he was still 10 years off receiving his company pension, and fifteen years away from being eligible for the State Pension.
“Investing for income became quite important,” he explained. “The investment landscape was very different then; it was possible to get a decent income from high-interest savings accounts. But we started taking investment more seriously, we could see this was the most effective way of providing an income.”
Abbotts says that since then his tax efficient portfolio has largely been invested in equity income funds.
“I like the fact that as well as getting an income from these funds, we’ve also benefitted from capital growth too,” he says. “These investments have helped provide a decent income when we’ve needed it, but are still growing for our future.”
Abbotts is now 71, and the income from this portfolio is less important because he receives a State and company pension. He instead chooses to accumulate any income generated from his fund investments, but likes the option to draw an income again in the future.
One of Abbotts core holdings was Invesco Perpetual High Income. He first invested in this via a PEP, when it was known as Perpetual High Income. At the time, the fund was run by Neil Woodford – who wasn’t quite as high profile as he is today.
Following Woodford
Abbotts says they have been “extremely happy” with the long-term performance of this fund, but he moved their moved their money following the departure of Woodford to set up his own firm. The management of the Invesco fund was taken over by Mark Barnett.
Abbotts says: “We stayed for a bit, but felt the performance wasn’t as good. We follow fund ratings, and it seemed to fall, so we decided it was time to switch to Woodford Equity Income.”
Invesco Perpetual High Income has a Bronze rating from Morningstar analysts, and a four-star performance rating. Morningstar analyst Peter Brunt says: “The fund benefits from an experienced manager in Mark Barnett, who is proving a steady hand despite his increased responsibilities and assets under management.”
Brunt points out that Barnett follows a similar “high-conviction” approach to Woodford, combing both macro views and bottom-up analysis. However, he notes that as many of Barnett’s ideas come from the mid- and small-cap sectors this can result in periods of short-term volatility.
Woodford Equity Income has a Silver Rating from Morningstar analysts. Brunt says: “This fund remains one of our higher-conviction ideas in the UK equity income space.” He describes Woodford as “one of the most talented fund managers” and points out that he applies the same investment approach that enabled him to build up a consistent long-term track record at Invesco Perpetual.
Other Equity Income Funds are Available
Abbotts holds his ISA with Chelsea Financial Services. Other core holdings include Jupiter Income Trust and Jupiter Distribution and Growth.
Both of these funds also get Bronze Ratings from Morningstar analysts.
Morningstar says Jupiter Distribution and Growth “is a good choice for investors seeking high income and growth from a relatively aggressive equity and bond fund”.
It is the most aggressively managed of Jupiter’s three distribution funds – all of which are managed by the same process. It is run by Alistair Gunn, who manages the equity portion of the fund, and Rhys Petheram, running the bond portfolio.
Jupiter Income Trust is run by Ben Whitmore, who took over the fund in 2013. Morningstar says he takes “a contrarian and value-orientated approach”. However, as he favours stocks that pay a higher dividend this has seen a bias further up the market-cap scale, when compared to peers.
While the fund has performed well against its benchmark since Whitmore took the helm, Morningstar notes that this larger-cap bias has meant relative returns against peers has been more variable – particular in the couple of years running up to 2016, as small- and mid-cap stocks outperformed their FTSE100 counterparts.
Looking Overseas for Income
Abbotts says: “In the past we have dabbled with some overseas holdings. In recent years there have been more global options for income seekers like ourselves.”
But he says in recent years he’s been less happy with taking on the additional risk of currency. “Currently the only non-UK fund we hold is Jupiter European.”
The couple plan to use their investment portfolio to support them through their retirement. But despite now being in his 70s Abbotts is not planning on getting out of equities – or equity income funds – in the near future.
“The market might crash, but what is the alternative, particularly if you need an income? Most bank accounts seem to be paying 0.1%. We’ve maxed out on any account that pays slightly more, but they don’t pay anywhere near enough to keep up with inflation.”
He adds: “It may change in future. We will wait and see. I can remember when you could get 12% interest on your savings, but were paying 15% on your mortgage. I tell that to my kids but they just roll their eyes, but we may find interest rates edge up again in future.”
