Ignis Asset Management UK equity income manager Martin Brown believes bigger funds in the sector face performance issues due to a concentration of stocks.
He says some of the bigger funds are finding it almost impossible to diversify their portfolios.
Research from Evolution Securities shows 51 per cent of income in the UK comes from the top 10 companies and, on average, eight out of 10 managers in the sector would own any one of those stocks.
He says: “Do eight out of 10 managers really think they can add value in the analysis of these mega caps, whose every movement is pored over by hundreds of analysts worldwide?”
Brown says some funds with over £1bn under management are constrained by being unable to move further down the market-cap spectrum as they would end up holding under large portions of companies – a problem that smaller funds do not face.
He says: “A manager with assets under management of £1bn taking a 3 per cent position in the biggest stock in the FTSE 250 – ITV – would end up owning only 1 per cent of the company’s equity.”
Bestinvest senior investment adviser Adrian Lowcock says: “I would say it is important to diversify by having more than one income fund in case we see a repeat of BP.
“You can understand the gravitation towards larger caps for income, given the volatility of small-cap offerings. I would look at overseas income funds which are just as attractive.”