AMP Capital is developing an Australian equity fund for retirees and super funds, including self-managed superannuation funds (SMSFs), which will provide tax-effective income that is high, stable and which grows over time.
Senior portfolio manager Michael Price said "the industry used to design all the products for accumulators, but we're now realising that the decumulators, the retirees, have different needs. The industry as a whole has been a bit slow to recognise that."
The proposed fund, with a working title of Australian Equity Tax-Effective Income Fund, would focus on the half of the ASX200 which paid fully franked dividends, but there would also be some stocks "that don't pay a high dividend but they are going to reduce the risk or increase the total return".
Price, a 20-year veteran of ING's Blue Chip Imputation Fund, joined AMP Capital late last year because "AMP Capital was very keen to enter the space and gave me a blank sheet".
The proposed AMP Capital fund would be driven by objectives, rather than just product creation. "It's being designed from the 'customer back'," Price said.
"I'm not sure that everyone does this," he said.
"The key reason for an equity income fund is to provide income that grows over time. Australian equity income is high, stable and grows over time."
Coming from a background in quantitative portfolio construction, Price said retirees had the least tolerance for volatility because the greatest proportion of their wealth was in their current assets.
"Some funds give up some total return and get low volatility, but if [the return] is too low then it stops being an equity fund. Some of these funds can have a beta as low as 0.5, which effectively means 50 per cent cash," Price said.
In contrast, the proposed AMP Capital equity income fund could have 85 per cent to 100 per cent in effective equity exposure. It would have lower volatility than other non-income funds.
"It is a growing-income fund, not a level-income fund. The fund will be index-aware but not index-hugging," he said.
"Tax-effectiveness means something completely different for retirees than it does for people in the top marginal tax rate. For retirees, the key is maximising franked dividends and turnover does not matter - in fact turnover that provides franked dividends would be good. For top marginal tax individuals, the key is maximising long-term gains, and stock turnover is bad."
Price said that if investors went to an active manager, they expected to receive the index return plus some alpha.
Currently AMP Capital was modelling a fund with an aim of 7.5 per cent income, 2.5 per cent growth (that is, the RBA's target for inflation), plus maintaining an alpha target of 2 per cent per annum. The methodology would be to avoid giving up total return in the search for income.
"When you go to an active manager you expect to get some value-added growth as well as the index. As you do things to increase the income, the risk is by putting some additional constraints on you lose the ability to generate alpha, value-added."
"Only about half the ASX200 pays fully franked dividends, so that cuts the fund's universe to about 100 companies. But the absolute top-yielding stocks, the top 10 per cent, often don't have any growth because they often have real structural problems, for example Centro. It isn't as simple as just buying the income. It's harder than that."
