Asset managers are expanding their range of equity income funds to include global and multi-asset offerings as returns are increasingly hard to come by but does that mean UK equity income funds should be left behind?
Choosing the best funds in the UK equity income sector is difficult as there is duplication in the top holdings of the funds. This may make UK equity income funds look less attractive against the latest global equity and multi-asset income launches that have a wider income range to choose from.
Seven out of 10 of the best-performing UK equity income funds over three years to May 8 have blue chips BP and GlaxoSmithKline in their top 10 holdings, according to data from FE analytics.
These are the £159m Aberdeen UK equity income, £265m Royal London UK equity income, £74m Cazenove UK equity income, £224m Walker Crips equity income, £318m Henderson UK equity income, £1bn JOHCM UK equity income and the £61m RBS equity income funds.
Threadneedle UK equity income fund manager Richard Colwell says he holds some of the big dividend-payers but he also holds some stocks advisers may not expect, such as Marks & Spencer.
Colwell says: “We have no exposure to 13 of the top 20 biggest stocks in the UK market and no miners or domestic banks so although some of the biggest names like GlaxoSmithKline are in the portfolio, we want to take sizeable positions where we have an angle or the most conviction rather than lots of smaller positions.”
OPM Fund Management chief investment officer Tony Yousefian says when he looks for income funds for the £5m OPM UK equity fund, it is important to achieve exposure across the cap scale.
He says: “We know which stocks managers hold to ensure we get good exposure to the whole of the market. We invest in a mix of funds that invest in the blue-chip end of the market and those that invest in the smaller to mid-cap end of the market.
“Our small and mid-cap fund managers are the likes of Gervais Williams, who runs the £17m Acuim UK multi cap equity income fund.”
Chelsea Financial Services managing director Darius McDermott agrees there is an issue with the overlaping of holdings in UK equity income funds.
He says: “A lot of UK income funds invest in very similar stocks due to the concentration of stocks that actually pay a dividend. The top 10 stocks on the FTSE All Share pay about half of the total market dividend and the top 20 stocks pay two-thirds. Going global means you are diversifying away from the big dividend payers in the FTSE.”
McDermott adds that for a more diversified play in the UK equity income sector, the £457m Standard Life UK equity income unconstrained fund is worth a look as it invests further down the mid-cap scale.
Rathbones head of multi-asset David Coombs says he uses UK equity income funds in the £41m Rathbones multi-asset total return fund.
He says: “The UK equity income funds I tend to buy have a lower risk than growth funds, such as the £926m Edinburgh Investment Trust and the £595m Trojan income. They tend to buy quality companies that deliver consistent dividend growth and have well covered dividends.”
Equilibrium Asset Management investment manager Mike Deverell also uses UK equity income funds in his portfolios.
He says: “The UK equity market in general is our favoured market at the moment. It looks undervalued in terms of price to earnings.”
He says the UK recession and austerity measures are not a concern as many UK companies get a lot of their earnings overseas.
He says: “Investing in the UK market means you get a diverse spread of companies. It also makes sense for income investors to have their investment in their own currency, as this is the currency in which they spend their money.”