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Experts call for better income disclosure as Budget reforms loom

Pension reforms that will see more Britons shun annuities and turn to the markets for their income will bring even greater focus on the cash pay outs from funds.

Experts are calling for the industry to boost the information they give about the cash funds deliver to investors, rather than only total return figures.

Each year, retired IFA Bruce Dalton uses Lipper data to rank UK and global equity income funds in terms of the cash they return on a £1,000 investment and the capital left afterward over three years.

The Insight Equity Income Booster topped the list of UK Equity Income funds, posting £298 to investors and ending up with £1,102 in capital. It topped the list last year as well.

The top yielding global fund was Artemis Global Income, which delivered £183 and retained capital of £1,493.

Four funds have consistently delivered first quartile payments over three years going back to the period ended January 2008: Allianz UK Equity Income, JO Hambro UK Equity Income, Newton Higher Income and Schroder Income Maximiser.

Morningstar EMEA head of investment consulting and portfolio management Dan Kemp says the lack of income information available is likely due to the greater use of funds in the past couple of decades, where in the past investors would have bought direct equities or bonds for their income.

Now that income can be eroded by the strategy employed by the manager, the structure of the fund and also in platform and other administration charges, Kemp explains.

“There are lots of areas of leakage of income so people are disappointed in the level of income they receive,” he says.

Also, with yields depressed to raw levels in the past few years, any fall in income is more keenly felt by investors which is adding to the urgency of the income debate, Kemp says.

Whitechurch Securities managing director Gavin Haynes says: “Any increase in the transparency in information regarding distributions would be helpful for the end investor. That’s something we’d welcome.”

Whitechurch uses dividend per share information when picking funds, but it is not on most factsheets, he says.

“It’s not something that’s standard. The historic yield is quoted but that tells half the story. It doesn’t show the monetary amount paid out on £100 invested. How much is paid out and the year-on-year changes would be interesting to see more widely circulated.

“We’re certainly keen on funds that can increase distributions and so will people in drawdown and taking a long-term view and wanting income but also wanting that to grow ahead of inflation. That’s going to be a key thing to look for in equity income.”

Haynes suggests a table setting out the cash amount paid going back several years would help end investors choose income funds more accurately.

“The Investment Association [formerly IMA] could certainly champion that, but also fund houses themselves. Certainly funds that have a good track record could really push it because it’s something that would widely appeal to investors.”

Investment Association public policy director Jonathan Lipkin says yield data is available for equity income funds on the IA’s website.

“Under the 2014 statement of recommended practice for investment funds, a new table in the annual report will show the amount of income paid out in the context of the capital value remaining,” he says.

He agrees the pension freedoms will encourage pensioners to look at different ways to gain income.

“Whatever approach is used, there will be a considerable responsibility on pension schemes, advisers, distributors and product manufacturers, including fund managers, to ensure that their end clients have access to clear information,” he adds.

The IA is continuing to work with members and regulators to improve disclosure.

Independent asset management consultant Nick Wells says the true income levels of funds is “pretty powerful” for those investors dependent on income or in drawdown.

“With an ageing population this sort of information is extremely valuable. The demand of income is forever growing,” he says.

“It’s good to see it, not in isolation, but in terms of the capital growth as well.

Wells believes global income funds would do a better job of protecting capital because they are inherently more diversified than a UK-focused fund.



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