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Clustering a concern for UK equity income sector, says S&P

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There is rising concern over the degree of “clustering” among UK equity income funds, according to Standard & Poor’s Fund Services in its latest review of the sector.

“Clustering is a measure of where funds are invested in the underlying market,” says S&P Fund Services analyst Peter Brunt. “For example, the absence of banks from investors’ dividend radar now means that over 66 per cent of the UK market dividend is provided by just 15 companies.”

Using all S&P Fund Services’ rated funds as a sample, the survey shows high levels of overlap of names among each fund’s top ten holdings. For example, 22 of the 23 S&P Fund Services-rated UK equity income funds had Vodafone as a top-ten holding. Other holdings in common included BP, which is a top ten holding in 88 per cent of the funds, ahead of GlaxoSmithKline (87 per cent), Royal Dutch Shell (78 per cent), AstraZeneca (75 per cent), HSBC Holdings (61 per cent) and BAT (53 per cent).

“Obviously these are very large capitalisation companies and we have not taken either the size of each fund or of each individual position into account,” says Brunt, “but it does highlight the potential crowding of certain stocks within the sector.”

Several managers noted this as a real concern. Brian Gallagher’s UBS UK Equity Income Fund combines a uniquely structured portfolio – with its balance between capitalisations, growth stocks and European names – with covered calls to allow for sufficient yield while maintaining diversification. Jupiter’s Tony Nutt was also concerned by this high level of concentration and had included a small number of European names into the Jupiter Income Trust to diversify his returns.

Yet not all managers are overly concerned with clustering. Threadneedle’s Leigh Harrison, for example, found the majority of new ideas for his two income funds outside the FTSE 100, including industrial stocks Melrose and Ashtead.

For at least one investor, concentration and scale of investment has little effect on his investment approach. Invesco Perpetual’s Neil Woodford has over GBP18bn in assets under management run primarily off the same strategy and is consequently one of the largest shareholders in several FTSE 100 names. 

“When, for example, he sold out of BP and Royal Dutch Shell in June 2009, he used the profits to add to his existing positions in AstraZeneca and GlaxoSmithKline, taking each to over eight per cent in both his Income and High Income funds. Since these funds together account for GBP14bn, he was holding over GBP1bn in each company,” says Brunt.

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