With more than 20 distribution funds currently available to retail investors, it is important that advisers and their clients understand what these products offer and what is going on under the bonnet.
Originally created by life offices looking for a way to enable investors to earn a healthy level of regular income without having to sell units of their funds, distribution funds today are much more akin to ‘multi-asset’ funds.
The majority of the distribution funds sit in the IMA Mixed Investment 20-60% Shares sector, which was created at the start last year when the industry body renamed the Cautious Managed sector. This ultimately means that these distribution funds have a cap on the equity exposure in the underlying portfolios of up to 60 per cent – what fund groups choose to do with the remainder differs significantly.
Richard Marwood, manager of the £913.7m Axa Distribution fund, says there are no hard-and-fast rules about what should be in a distribution fund.
“We tend to have between 50-60 per cent in equities then roughly 35 per cent in UK index-linked gilts, maybe 7 per cent in conventional gilts and 3 per cent in cash. But if you went to look at another fund you might find they have 45 per cent in equities and 55 per cent in corporate bonds. People approach this in a very different way,” he explains.
Of course, people would be attracted to these vehicles for the promise of an income, rather than for exponential capital growth.
Distribution funds, when analysed on an annual yield basis, are, on average, outpacing the consumer prices index (CPI).
CPI is currently running at 2.7 per cent and, by comparison, the largest distribution fund has a historic yield of 3.69 per cent.
But research carried out for Investment Adviser into distribution funds shows that the yields on offer vary significantly with some offering an income in excess of 5.4 per cent, and others less than 2.5 per cent.
With old-school distribution funds made up of a combination of index-linked bonds and to a lesser extent equities, the modern day product has certainly evolved into using a wider range of asset classes available.
David Hambidge, investment director, multi-asset funds at Premier, adds: “Modern distribution funds need to think about a lot of other types of asset classes beyond equities and both traditional and index-linked bonds.
“The future goes well beyond equities and bonds.”
