The number of UK equity income funds featuring Royal Dutch Shell and BP in their top ten holdings has dropped significantly, as fund managers respond to the wave of dividend cuts.
In January, when Octopus Investments first analysed the data (published in March), 65% of the funds in IA UK Equity Income sector held Royal Dutch Shell in their top ten holdings. According to the latest available data, by the end of May that number had almost halved following its dividend cut, with only 36% of funds now featuring the stock in their top ten holdings1. The proportion featuring BP, which is yet to cut its dividend, has fallen from 61% from to 43%, although it remains the third most ‘popular’2 stock in the sector.
The analysis also revealed that Lloyds Banking Group, HSBC and Legal and General have fallen out of the 10 most popular stocks, replaced by Imperial Brands, Relx and Phoenix Group.
Despite the movement, the overall picture remained the same, with a large proportion of funds relying on the same stocks to generate income. Indeed, Glaxosmithkline strengthened its position and is now the most popular stock by some distance, featuring as a top 10 holding in 80% of all funds in the sector, up from 76% in January.
The 10 most popular stocks across the IA UK Equity Income Sector1
(out of 84 – including Octopus)
| Stock | Sector funds featured as a top 10 holding? 2 | As a % of other funds (out of 84) | |
|---|---|---|---|
| 1 | Glaxosmithkline | 67 | 80% |
| 2 | British American Tobacco | 39 | 46% |
| 3 | BP | 36 | 43% |
| 4 | Astrazeneca | 31 | 37% |
| 5 | Rio Tinto | 31 | 37% |
| 6 | Royal Dutch Shell | 30 | 36% |
| 7 | Imperial Brands | 27 | 32% |
| 8 | Phoenix Group | 26 | 31% |
| 9 | Relx | 25 | 30% |
| 10 | Unilever | 24 | 29% |
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 22 most popular stocks across the IA UK Equity Income sector1.
This approach continues to pay off, as despite the recent volatility, the fund remains at the at the top of the sector in the year to June 30th, returning +3.9% against the sector average of -13.6%3.
Top 10 holdings in the FP Octopus UK Multi Cap Income Fund (MCIF)
(out of 83 – excluding MCIF)
| Stock | Sector funds featured as a top 10 holding? 2 | As a % of other funds (out of 83) | |
|---|---|---|---|
| 1 | Games Workshop group | 2 | 2% |
| 2 | Future | 1 | 1% |
| 3 | IG Group | 4 | 5% |
| 4 | Emis group | 1 | 1% |
| 5 | MJ Gleeson | 0 | n/a |
| 6 | Strix | 7 | 8% |
| 7 | Spirent Communications | 1 | 1% |
| 8 | Next Fifteen Communications | 1 | 1% |
| 9 | Pets at Home | 0 | n/a |
| 10 | Greencoat Renewables plc | 1 | 1% |
Chris McVey, Fund Manager for the FP Octopus UK Multi Cap Income Fund, said:
“As you would expect, income fund managers have had to adapt to the new environment, and many have rebalanced their portfolio in response. Yet as these figures show, the overall picture remains very similar, with significant concentration risk across the traditional UK equity income sector.
“Given how important this income is for the millions who use it to supplement their pensions, the dividend cuts of recent months should demonstrate the need for genuine diversification. However, as this data shows, simply investing in different income funds won’t necessarily give you diversification. This makes it crucial to look closely at the underlying holdings.
“Our multi-cap approach shows that diversification is possible and provides the opportunity for investors to 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:
- Lipper – latest available data – sourced 1st July 2020.
- ‘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.
- Source: Lipper to 31/06/20. Returns are based on published dealing prices, single price mid to mid with net income reinvested, net of fees, in sterling.
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.
| 6 months | Rank in sector | 1 year | Rank in sector | Since launch (10/12/18) | Rank in sector | |
|---|---|---|---|---|---|---|
| FP Octopus UK Multi Cap Income S Acc | -11.3 | 4/85 | 3.9 | 1/85 | 18.6 | 1/85 |
| IA UK Equity Income TR | -20.3 | n/a | -13.6 | n/a | -5.4 | n/a |
| FTSE All Share | -17.5 | n/a | -13.0 | n/a | -1.5 | n/a |
Source: Lipper to 31/06/20. 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: July 2020.