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Pension freedom – where are people investing?

Four months on from the new pension freedom rules, here’s an in-depth analysis of where drawdown savers have been investing their pension through their drawdown account. From Hargreaves Lansdown.

Four months on from the new pension freedom rules, here’s an in-depth analysis of where drawdown savers have been investing their pension through their drawdown account. From Hargreaves Lansdown.

In summary – Drawdown investors target growth as well as income; The ‘Passive Pension Gap’: only £1 in every £20 invested in funds goes passive; Lloyds is the most popular share held by drawdown investors; Average drawdown fund portfolio has only 18 percent invested in bonds; Most popular funds and investment trusts; Both Woodford and Barnett prove popular choices with drawdown investors. Laith Khalaf, Senior Analyst, Hargreaves Lansdown: ‘Pension freedom opened up a whole new world of investment opportunities for many retiring pension savers, and they certainly seem to be making the most of the new flexibility.What is particularly striking is there is clearly an appetite for growth, as well as income, which suggests investors are saving some of their jam for tomorrow, as well as using their pension pot to produce an income today. Passive funds are not yet well represented amongst drawdown investors, which reflects the current dearth of income-orientated passive funds on the market. In time this may change as providers bring new products to the market to fill the passive pension gap.’

Most popular funds

Here are the 10 most popular funds held by investors who have opened a drawdown account since 6th April 2015, listed alphabetically. While there is a clear preference for income, three of the top ten funds are outright growth funds (Artemis Strategic Assets, First State Asia Pacific Leaders and Lindsell Train Global Equity). This suggests investors are positioning their portfolios for long term growth, as well to provide them with a regular income stream.

*Top 10 excludes HL Multi-Manager funds

Most popular fund sectors

A similar trend can be observed in the most popular fund sectors; UK All Companies and Global sectors mainly contain growth funds yet feature in the five most popular sectors. However the UK All Companies sector also contains a number of popular income funds which have been ‘booted out’ of the UK Equity Income sector; Invesco Perpetual High Income is one such example.

Mixed Investment 40-85% / Shares 5.38%

The ‘Passive Pension Gap’ *not including individual stock holdings or cash

Only £1 in every £20 is invested in passive funds within drawdown, compared to around £1 in £10 in the wider funds marketplace. The popularity of passive funds has been growing of late, particularly as a default option within company pension schemes. However when it comes to turning the income taps on, passive strategies currently look like a fish out of water. There are very few income-orientated passive funds in the marketplace, so while they tick the growth box, they are somewhat lacking in the income department. We expect this to change as passive providers get their game head on and try to make more progress in the new post-retirement space, in the same way they have in the rest of the market.

Most popular shares

Lloyds is the most popular share held by drawdown investors. This is despite the fact that it has only just returned to paying a (minimal) dividend after a six and a half year hiatus. Like many UK Equity Income managers, private investors are clearly stocking up on Lloyds in anticipation of the dividends to come. Analyst expectation is for a total dividend of 3 pence per share in 2015 and 4 pence in 2016, which based on the current price would mean a yield of 3.6 percent and 4.8 percent respectively. The government is of course also planning to sell some of its remaining stake in Lloyds to the general public within the next year. Given the existing popularity of Lloyds, we would expect a great deal of demand for this sale from drawdown investors, seeing as it will have a sweetener attached in the form of a discount to the market price and most likely some bonus shares attached too. Here are the 10 most popular shares held by drawdown investors. The percentage figure shows the proportion held in each stock of the total assets held in all FTSE shares by drawdown investors (i.e. not including the value or unit trusts, investment trusts and other holdings).

Investment trusts

There are plenty of income-producing investment trusts out there, and unlike unit trusts they have a ‘revenue reserve account’ which helps them smooth out dividend payments. However the list of the most popular investment trusts suggests drawdown investors are going for growth with their investment trust holdings. Three of the top five investment trusts are growth-seeking funds, the other two (Edinburgh Investment Trust and City of London Investment Trust) being UK Equity Income trusts. Notably both Neil Woodford and his successor at Invesco Perpetual, Mark Barnett, make the list of both most popular unit trust funds and most popular investment trusts (Barnett manages the Edinburgh Investment Trust and Invesco Perpetual High Income).

Overall portfolio trends

Managed funds are by far the most popular option for drawdown investors, accounting for almost £70 out of each £100 invested. There is a significant number of drawdown investors who are building their own share portfolios however, either instead of or alongside their managed funds. 57 percent of our drawdown investors invest in unit trust funds only. 29 percent invest in a mixture of individual shares and funds, and 15 percent invest in shares only (including investment trusts and ETFs).

*does not include cash holdings

**listed on main UK stock exchange

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