The global approach to income
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We very much believe in dividends being part of the total returns for equities and feel that if you can grow your dividends over time, you get stronger outperformance - both on a stock and fund basis. We are sold on the idea of equity income being UK-core, and the first Isa that people buy should be this type of fund.
Where I have concerns is with regard to the number of clients who have a lot of these funds now and are getting a large part of their income from just four or five stocks.
It is attractive versus cash, there is no doubt about that. Cash is at 0.5 per cent and the market is yielding about 3.3 per cent. Equity income funds are mandated to get 110 per cent of that yield so I imagine the average fund is yielding about 4 per cent at the moment.
There is an obvious concentration of the top stocks and sectors. The figures move around but something like the top five stocks are 45 per cent of the overall market dividend and the top seven account for around 60 per cent.
Almost by definition, nearly all income managers have to own most of these. You do not want to be in a position where an income manager has to hold a stock for a yielding reason if he really dislikes the company.
My other concern is that our clients probably have a lot of money in UK equity income already. Neil Woodford runs the most money in the City and some of the other income funds from Artemis or Jupiter are also quite sizable. Given the concentration of where the dividend is coming from in the sector, I worry slightly about diversifying that stream of income. We are starting to look favourably at global income funds, not instead of but in addition to UK funds.
Given that banks no longer pay, some of equity income’s traditional bedfellows - oil, utilities, tobacco and pharmaceuticals - under-performed
last year, so if the market is to stay reasonably resilient there could be a broadening into these sectors. Meanwhile, some of those yielding areas are starting to look like the value in the market. I am not anti-equity income in that it remains the core for our clients but I take care to identify when they have too much of it.
