Mark Dampier: 'Get into the swing - why equity income can boost your pension'

Mark is investing more of his own pension in equity income funds

Not for the faint-hearted? A fairground ride in Mexico City. The Newton fund believes there is long-term potential in the country (AP)

Despite their perceived complexity, new pension freedoms have highlighted a simple fact – pensions are just a tax efficient savings plan. Real freedom can only be achieved if, by retirement, your pension pot is large enough to sustain your lifestyle. While investment growth should provide your savings with a boost, it is also necessary to contribute a sufficient sum throughout your working life.

Retirement doesn't beckon me yet, but I am investing more of my own pension in equity income funds. Why? I would prefer to live off the natural yield my investments produce rather than depleting the capital value. Equity income investing aims to provide a sustainable and growing income along with an element of capital growth over the long term.

Until quite recently, the UK stock market used to be the only feasible option for this approach. Companies in the UK understood a focus on dividends payments could instill discipline in management. If they commit to paying sustainable dividends, they are less likely to fritter cash on uneconomic growth or unnecessary acquisitions.

Today, overseas companies are responding to the demand for shareholder reward. Even in the exciting world of emerging markets, it is now possible to obtain a reasonable level of income; something the Newton Emerging Income Fund, which currently yields 4.19 per cent, can testify to.

The fund's managers, Sophia Whitbread and Jason Pidcock, expect emerging markets to experience varied fortunes and the performance of individual countries to diverge over time. Countries that have built up imbalances and are victims of a changing trade environment are likely to face significant pressure. It's different for countries that benefit from falling commodity prices and those pursuing reform. With growth prospects in the developed world uninspiring, they believe select emerging market economies can outperform.

The managers use a thematic approach, identifying trends and developments before selecting companies most likely to benefit. The region's growing middle-class is currently a key theme within the portfolio. They expect individuals to place a greater importance on health as they move out of poverty, benefiting the pharmaceutical and healthcare industry. They also expect greater demand for consumer goods. Elsewhere, the portfolio has a high exposure to telecoms to profit from the boom in emerging market smartphone use.

The fund has very little exposure to the energy and commodity sectors. The managers feel China's slowdown in energy and materials consumption will have a large impact on global demand and therefore the profitability of the companies involved. This has benefited the fund's recent performance as these sectors have had a torrid time.

Over the long term, they are positive on prospects for China, Mexico and the Philippines as their governments plan reformist policies. However, as they are wary of investing in state-owned companies, the fund's exposure to China is lower than that of the benchmark. The fund also has no exposure to Russia, as its outlook has deteriorated following sanctions imposed by the US, and with only a tentative improvement in the oil price, they prefer to observe from the sidelines.

Additionally, the fund has no investments in Indian companies, primarily because they pay little dividends. This has hurt recent performance as India has been one of the best performing stock markets over the past few years. While Indian companies continue to pay low dividends, it is an unlikely area of investment for equity income funds; however I feel the investment case in this region is strong.

For investors seeking an income away from the UK, the fund deserves consideration. It has the backing of a well-resourced team, whose thematic approach to investing has proven a success over the long term. The fund provides access to some of the world's fastest-growing nations, with the added attraction of a regular, and potentially rising, income. Alternatively, the JPMorgan Global Emerging Markets Income Trust could be considered by those who prefer investment trusts.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit hl.co.uk