Perspectives - How we’ve navigated the income scene since Pension Freedoms

The Premier Miton Cautious Monthly Income Fund

Premier Miton Cautious Monthly Income Fund was launched, in June 2011, as TM Darwin Multi Asset Fund. Following the acquisition by Miton in June 2014, a new direction for the fund was needed. By then, Anthony Rayner and I, were running a much expanded range but the product we felt most needed was an income fund. Following Pension Freedoms in April 2015 we expected there would be a large and growing need for funds that distributed a regular income to complement the already well served market for funds to address the accumulation phase.

However, markets were in their extended lower for longer phase, during which growth as an investment style was performing very well. Hence, at that time there was a strong preference for growth focused investments.

Investment platforms used by IFA’s were not capable of dealing with income, they had been set up to facilitate regular income by unit encashment. Indeed, many platforms did not even onboard the income units of funds. Leaving advisers no choice but to use accumulation strategies and encash units.

Market need

Despite these headwinds the majority of our growing client base was buying the income units. There was clearly a market for consistent and growing income, although small it was growing.

We had set out to create a fund that provided an income that looked like a salary. A regular and reliable monthly payment. Hence, we set out to provide even monthly payments with a larger payment at the end of the annual accounting period. This required a good deal of additional work, we went on a steep upward learning curve, particularly as we didn’t want to achieve this at the expense of total return.

Lower for longer

The early period for the fund was characterised by low and falling interest rates. This meant total returns from bonds were good, but yields were relatively low. During this era, which persisted until the end of 2020, we sought out bonds which provided an attractive return in the form of income to maturity. This was complemented with exposure to long dated government bonds, enabling us the potential to benefit from falling yields.

During this period many growth themes were in favour within equities, so we complemented these with higher yielding shares often in sectors in tobacco energy and materials.

Lockdowns create massive challenges

The lockdown era was by far the greatest challenge the fund has faced. Many companies in Europe and the UK, on whose dividends we had consistently relied, took the prudential decision to not pay a dividend. This led to a major challenge to continue making the monthly payments and to meet the final payment, as it occurred at the very time that most dividends were expected. We had to address this, whilst at the same time dealing with the major market gyrations. Thankfully, while dividends were being cut in Europe, many companies in Asia were much less impacted, so we were able to replace the lost income.

The equity market then emerged into a major recovery phase, with the rally being led by US large cap growth stocks. We made the decision to balance the income needs with the requirement to participate in the rally.

Double edged swords

The post covid period has been characterised by rising bond yields worldwide and the huge continued outperformance of US equities, particularly the MAG7.

This has very much created two double edge swords for income management. In bonds, higher yields were now available, but these were being offset by capital losses. We moved the bond portfolio to the short end of the yield curve, to minimise the capital erosion from rising yields. Advantageously, we were able to improve the credit quality of our bonds, now yields were higher, which feels prudent with credit spreads being so narrow.

Equities have been in a major bull market, led by low and zero yielding US large cap tech stocks. To address this, we have been holding our largest exposure to the US equity market, but have been constantly harvesting these gains to reinvest into higher yielding positions. This strategy has been successful at balancing the total return objective, while still growing the income.

Premier Miton Cautious Monthly Income Fund income track record

Source: Premier Miton, based on class B income units. In November 2015, the fund’s objective was changed to focus on income generation. From this date, income generation, charges were applied to capital and dividend payment frequency changed to monthly. Fund launched: 09.06.201. The level of income paid by the fund is not guaranteed and will fluctuate.

During 2024 and into 2025 interest in income strategies has transformed. The first generation not to have defined benefit pensions or who took advantage of pension transfers, are now entering the pre- and post-retirement phase.

At the same time, the regulatory environment has changed such that the advisers are being encouraged to directly address retirement income rather than indirectly via unit enchashment.

Finally, increasing concerns that the US and MAG7 bubble has burst, make the stability of income a much more attractive proposition.

Fortunately, having jumped the gun with our income launch way back in 2016, we now have long and highly consistent income track record, combined with a proven ability to navigate many very diverse market environments.

David Jane

Premier Miton Macro Thematic Multi Asset Team