Millions of income fund investors rely on the same stocks to generate a regular income, yet the options for genuine diversification are highly limited, according to new analysis from Octopus Investments.
An in-depth look at the 84 funds within the IA UK Equity Income sector reveals that many of the same stocks feature as a top 10 holding across a large number of funds. The most ‘popular’1 stock by some distance was GSK, which featured as a top 10 holding in three quarters (76%) of the funds2. This was followed by Royal Dutch Shell and BP.
While the 10 most popular stocks are often favoured by fund managers for their track record of dividend pay outs, their dividend cover estimated to 2021 was less impressive, with an average of just 1.59x3.
Their estimated annual dividend growth4to 2021 is also fairly modest at just 3.65%3. This was only slightly above the FTSE 100 average of 3.50%3 and the FTSE 250 average 3.38%3 over the same time period.
The 10 most popular stocks across the IA UK Equity Income Sector (out of 84 funds)
| Stock | Number of funds as a top 10 holding?2 | As a % | Dividend cover3 | Average annual dividend growth3 | |
| 1 | GSK | 64 | 76% | 1.57x | 0.13% |
| 2 | Royal Dutch Shell (A&B) | 55 | 65% | 1.31x | 2.96% |
| 3 | BP | 51 | 61% | 1.47x | 3.19% |
| 4 | Astrazeneca | 32 | 38% | 1.83x | 2.76% |
| 5 | British American Tobacco | 32 | 38% | 1.52x | 5.29% |
| 6 | HSBC holdings | 25 | 30% | 1.43x | 1.64% |
| 7 | Legal and General | 23 | 29% | 1.66x | 7.59% |
| 8 | Rio Tinto | 23 | 27% | 1.55x | 3.00% |
| 9 | Unilever | 21 | 25% | 1.53x | 6.86% |
| 10 | Lloyds Banking Group | 20 | 24% | 2.01x | 3.03% |
| # | Average | n/a | n/a | 1.59x | 3.65% |
An option for genuine diversification
The FP Octopus UK Multi Cap Income Fund, launched in December 2018, invests across the entire market spectrum. Despite this, not one of its top 10 holdings appear among the 33 most popular stocks across the IA UK Equity Income sector2.
This approach has paid off as the Fund was the top performer in its sector in 2019, returning 34.0% against the sector average of 19.0%5.
Across its top 10 holdings, which include STV Group and Strix, the dividend cover estimated to 2021 is 2.03x, compared to just 1.59x for the most popular stocks across the sector. More significantly, the estimated annual dividend growth is 13.62%, more than three times that of the sector average.
Top 10 holdings in the FP Octopus UK Multi Cap Income Fund – (out of 83 funds excluding the MCIF)
| Stock | Number of funds as a top 10 holding?2 | As a % | Dividend cover3 | Average annual dividend growth3 | |
| 1 | MJ Gleeson PLC | 0 | 0% | 1.89x | 8.20% |
| 2 | Sabre Insurance | 1 | 1% | 1.01x | 13.87% |
| 3 | Ten Entertainment | 1 | 1% | 1.72x | 11.01% |
| 4 | STV Group | 0 | 0% | 2.26x | 8.12% |
| 5 | Gateley | 1 | 1% | 1.60x | 8.82% |
| 6 | Renew Holdings | 1 | 1% | 3.38x | 10.45% |
| 7 | Strix | 3 | 4% | 1.88x | 33.09% |
| 8 | First Derivatives plc | 0 | 0% | 2.85x | 10.44% |
| 9 | Intermediate Capital | 3 | 4% | 1.75x | 20.57% |
| 10 | Watkin Jones | 2 | 2% | 2.00x | 11.59% |
| # | Average | n/a | n/a | 2.03x | 13.62% |
Chris McVey, Fund Manager for the FP Octopus UK Multi Cap Income Fund, said:
“With interest rates stubbornly low, income funds have become a vital part of retirement planning and millions across the UK now rely on them to supplement their pension. However, as these figures clearly show, there is significant concentration risk within the traditional UK equity income sector, the extent of which might come as a surprise to some.
“People often make an entirely reasonable assumption that you can achieve diversification by investing in different income funds from different managers. Yet in reality you’re getting a very similar product, just in a different firm’s packaging. This makes it much more difficult for investors to build a balanced income portfolio and means they might want to look more closely at the underlying holdings.
“Our multi-cap approach means investors benefit from the significant number of companies capable of generating superior profit growth and attractive income, particularly further down the market cap spectrum. Within mid-cap and small-cap companies, gems continue to be found, and they tend to outperform their larger peers, while demonstrating this faster growth in earnings and dividends.”
-Ends-
Notes to editors:
- ‘Popularity’ is measured by the number of times a stock features as a top ten holding in one of the funds. The ‘most popular’ stocks are those which feature most often as a top ten holding across the IA UK Equity Income Sector.
- Lipper – latest available data – sourced 22 January 2020.
- FactSet – as at 31st December 2019.
- Average dividend growth is calculated as compounded average growth rates of Dividend Per Share for 4 years, estimated to financial year end 2021.
5. Please note past performance is not a reliable indicator of future results. Risks to bear in mind:
The value of any investment can fall or rise, and you may not get back the full amount you invest. Smaller company shares are also likely to fall and rise in value more than shares in larger, more established companies listed on the main market of the London Stock Exchange. They may also be harder to sell. For the FP Octopus UK Multi Cap Income Fund, fees will be deducted from capital which will increase the amount of income available for distribution. However, this will erode capital and may hinder capital growth.
| 31/12/2018 31/12/2019 | 31/12/2017 31/12/2018 | 31/12/2016 31/12/2017 | 31/12/2015 31/12/2016 | 31/12/2014 31/12/2015 | |
| FP Octopus UK Multi Cap Income S Acc | 34.0% | n/a | n/a | n/a | n/a |
| IA UK Equity Income sector average | 19.1% | -9.4% | -13.1% | 16.7% | 0.9% |
| FTSE All Share Index | 19.8% | -10.5% | 11.3 | 8.8% | 6.4% |
Source: Lipper – 31/12/14 to 31/12/19. Returns are based on published dealing prices, single price mid to mid with net income reinvested, net of fees, in sterling.
For journalists in their professional capacity only. The value of an investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest. The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Investments in smaller and/or medium sized companies are likely to fall and rise in value more than investments in larger companies listed on the main market of the London Stock Exchange. They may also be harder to sell. Fees will be deducted from capital which will increase the amount of income available for distribution. However, this will erode capital and may hinder capital growth. The ACD of the FP Octopus UK Multi Cap Income Fund is FundRock Partners Ltd which is authorised and regulated by the Financial Conduct Authority no. 469278, Registered Office: Cedar House, 3 Cedar Park, Cobham Road, Wimborne, Dorset BH21 7SB. Investors should read the Prospectus, the Key Investor Information Document (KIID) and the Supplementary Information Document (SID) before investing as they contain important information regarding the fund, including charges, tax and fund specific risk warnings and will form the basis of any investment. The Prospectus, KIID, SID and application forms are available in English at octopusinvestments.com. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: March 2020.