The dangers of drawdown: BlackRock Income Strategies

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The dangers of drawdown: BlackRock Income Strategies

The new pension freedoms introduced on 6th April 2015 gave people more flexibility over how they access their retirement savings. One of the most popular options has been income drawdown, which is where you leave your money invested and take an income from the portfolio. Since the change in the rules more than 120,000 retirees have gone down this route rather than buy an annuity.

Drawdown allows you to keep control of your retirement savings and if all goes well it should generate a rising level of income while leaving the residual capital to be passed on to your beneficiaries. The problem is that the money is exposed to market risk so things may not go entirely to plan.

Lots of new funds have been created to tap into the drawdown market with one example being the BlackRock Income Strategies Trust (BIST). It was previously known as British Assets, but the mandate and management were changed about a year ago with the new objective being to generate a total return of CPI inflation plus 4% gross per annum over a market cycle of five to seven years. The managers also hope to grow the dividend at least in line with inflation over the medium term.

Like many of the other ‘drawdown’ funds, BIST uses a multi-asset approach to reduce risk and provide more capital stability than a pure equity portfolio. There is no guarantee, however, and the performance over the last few months shows the sort of risk that drawdown investors could be exposed to.

In the three months to 26th February the BIST share price fell by 13.6% to push the fund into negative territory since it was created almost a year earlier. Over the same period its CPI plus 4% target was 3.7% due to several months of deflation.

It is unfair to judge the fund over such a short and turbulent period, but drawdown investors need to be able to withstand these sorts of setbacks and hold on for the long term to give the fund a chance to claw back the losses and meet its objective over the five- to seven-year business cycle.

The managers have put together an interesting portfolio that has the potential to deliver a reasonable return once the markets stabilise. At the end of January 49.3% of the assets were invested in equities, with the UK making up 36% and the remaining 13.3% held overseas. Bonds made up a further 25%, volatility strategies 8.3%, alternatives 9.3%, commodities 3.2% and cash 4.9%.

The ten largest holdings accounted for 33.7% of the allocation and included UK blue-chip stocks such as HSBC, Royal Dutch Shell, BAE Systems, Prudential, Rio Tinto, Barclays, GlaxoSmithKline, Vodafone and Sky.

BIST pays quarterly dividends and in 2015 distributed a total of 6.54 pence per share. Based on the recent share price of 119.50p this is equivalent to a highly attractive yield of 5.5%. The fund has a market value of £328m and is trading at a 5% discount to NAV.


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