Revealed: the most popular funds among pension freedoms investors – and how they are performing

Tom Selby
25 March 2019


•        The fourth anniversary of pension freedoms is on 6 April 2019

•        New analysis reveals Fundsmith Equity has been the single most popular fund among savers who have entered income drawdown since April 2015 (see tables at the end of this release for full details)

•        Based on entering drawdown when the pension freedoms began in 2015 with a pension fund of £100,000 and taking a £5,000 annual income:
o   The best performer (Fundsmith Equity) would now be worth £165,100  
o   The worst performer (City of London investment trust) would now be worth £96,170 – a whopping £69,000 or 42% less
o   A portfolio split across the top 10 most purchased funds would now be worth £122,910

Tom Selby, senior analyst at AJ Bell, comments: 

“There has been a surge in investors using income drawdown since the pension freedoms were introduced and the great balancing act they face is generating a decent income that will last throughout their retirement.

“The good news is that so far, pension freedom investors have benefited from strong stock market returns and even better active fund selection, in most cases generating a golden combination of income and capital preservation.

“The disparity between the best and worst performers shows how important investment strategy is.  At one end of the scale is the Fundsmith Equity fund, which was the most popular fund and the best performer. £100,000 invested in that fund would now be worth £165,100 even with £5,000 being withdrawn each year as an income.

“Such growth makes even the punchiest withdrawal strategy look sustainable. Based on the £100,000 investment you could have withdrawn £15,000 a year and still have a pot worth £100,000 today. 

“At the other end of the scale is the City of London investment trust where £100,000 would only be worth £96,170 today after withdrawing £5,000 a year as income.  Even this is still a healthy looking picture though.”

Investment trusts deliver for income seekers
•        Investment trusts prove popular with pension freedoms investors, accounting for six of the top ten most purchased funds

•        Investment trusts produced the highest natural income without having to sell any investments:
o   Murray International yielded £17,590 over the 4 years
o   A portfolio split across the 10 funds would have delivered a natural yield of £9,108 and now be worth £136,710 
Selby says: “Despite City of London being the worst performer out of the ten funds, the data shows that income producing investment trusts can be great vehicles for people who just want to withdraw the dividends their investments produce, otherwise known as natural yield, without having to sell any of their funds. 
“Murray International and City of London for example would have enabled investors to take £17,590 and £16,830 respectively as natural yield, with Murray International still being worth more today than it was four years ago and City of London just a bit less.
“Investment trusts can deliver great total returns too.  The most popular trust – and second most popular collective investment pick overall – was Scottish Mortgage, which has turned £100,000 into £161,110 over the past four years, even with £5,000 withdrawn each year. 
“In reality, investors are unlikely to invest in just one fund but splitting a £100,000 income drawdown portfolio equally across the ten most popular funds would also have proved a very successful investment strategy.  After taking out £5,000 a year, you’d still be left with a portfolio worth £122,910, almost 23% higher than four years ago.”

Investors must beware hubris
•        Separate AJ Bell research suggests 30% of investors have no idea what has happened to their fund since entering drawdown
Selby continues: “Investors should not be lured into a false sense of security, however. Even star fund managers can suffer and the order of investment returns will have a significant impact on retirement outcomes.
“History has shown us that, at some point or another, stock markets are almost certain to blow up, and anyone who enters drawdown and takes big withdrawals at just the wrong time could severely damage their long-term prospects. In other words, don’t assume the experience of the last four years will be repeated in the next four years.”

Total returns + £5,000 per annum withdrawals

Most purchased funds by income drawdown investors since 6 April 2015 (in order of popularity)

Total return – no withdrawals

Total return - annual £5,000 withdrawal*

Fundsmith Equity

£192,100

£165,100

Scottish Mortgage (IT)

£190,700

£161,110

RIT Capital (IT)

£137,250

£114,520

iShares Core FTSE100 (ETF)

£120,580

£97,640

City of London (IT)

£118,740

£96,170

Lindsell Train Global Equity

£187,090

£158,040

Finsbury Growth & Income (IT)

£145,970

£120,960

Vanguard Lifestrategy 60%

£125,690

£104,130

Murray International (IT)

£136,270

£112,220

Personal Assets (IT)

£119,470

£99,210

     

£100,000 portfolio split equally across the 10 funds

£147,386

£122,910

Source: top 10 most purchased funds by income drawdown investors via AJ Bell.  Investment performance data from FE analytics 6/4/2015 – 28/3/2019.  *5% of opening fund value, taken quarterly


Natural yield (or dividends paid) + remaining fund value

Most purchased funds by income drawdown investors since 6 April 2015 (in order of popularity)

Natural yield (dividends paid)

Fund value remaining after taking natural yield

Fundsmith Equity

£4,700

£185,500

Scottish Mortgage (IT)

£4,470

£184,250

RIT Capital (IT)

£7,090

£129,070

iShares Core FTSE100 (ETF)

£16,070

£102,810

City of London (IT)

£16,830

£100,650

Lindsell Train Global Equity

£5,060

£180,120

Finsbury Growth & Income (IT)

£8,390

£135,890

Vanguard Lifestrategy 60%

£4,910

£120,240

Murray International (IT)

£17,590

£115,470

Personal Assets (IT)

£5,970

£113,100

 

 

 

£100,000 portfolio split equally across the 10 funds

£9,108

£136,710

Source: top 10 most purchased funds by income drawdown investors via AJ Bell.  Investment performance data from FE analytics 6/4/2015 – 28/3/2019.  

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