Income-seeking investors have no alternative to the large-cap favourites that dominate the IMA UK Equity Income sector, according to FE Alpha Manager Jan Luthman (pictured).

Luthman, who manages the CF Liontrust Macro Equity Income fund with fellow FE Alpha Manager Stephen Bailey, says that single-stock risk in the sector is unavoidable, and the established companies in the FTSE 100 which income funds favour are better-set than others to recover from setbacks.

“You have to be somewhere and if you are running an income fund you need a yield in excess of the All Share,” he said. “We are in a yield-hunting environment where safe – or supposedly safe – investments like government bonds are providing zero returns, and people are happy just to get their money back.”



“If you want yield it depends on how much safety you are prepared to sacrifice.”

Today’s FE Trustnet research has highlighted the high number of UK equity income funds that have large holdings in the same big dividend payers.

Luthman says that there is little choice for investors who want to get income other than these stocks, although he does limit the fund to a 5 per cent maximum on each holding. He adds there’s little point in diversifying outside of UK equities.

“By diversifying you just swap one set of risks for another. If you sell out you have to decide what you buy instead,” he said.

“You would have to go very far down the quality spectrum to get the yields you can get on equities from corporate bonds for example.”

Performance of fund versus sector and benchmark over 5yrs



Source: FE Analytics

Research from Unicorn Asset Management backs up Luthman’s view that income-seekers are being squeezed into certain investments.

The asset management company’s figures show that 50 per cent of the dividends from the FTSE 350 – the UK’s largest 350 companies – come from just nine companies.

The list of firms is very similar to the list of UK equity income funds’ biggest holdings FE Trustnet published this morning.

According to Unicorn Asset management, Vodafone’s dividends accounted for 9.4 per cent, those of Shell 9 per cent and HSBC 6.7 per cent. The other companies in the top nine were BP, BHP Billiton, GlaxoSmithKline, BAT, AstraZeneca and Unilever.

Luthman says that funds are increasingly exposed to single stock risk as a by-product of well-intentioned regulatory changes.

“I would say the regulatory environment is exacerbating single stock volatility. Share prices move more suddenly. In the old days news, both good and bad, would leak out slowly, so prices would adjust slowly. Now it’s much more sudden.”

“These days you cannot trade on information that isn’t in the public domain, so even if you did know something other people didn’t you couldn’t act on it. That means everyone is in the same boat, stock-specific risk is shared by everybody.”

“This is not a criticism of the regulation which I think comes from the best intentions and was necessary to create a level playing field, but it has increased volatility.”

AWD Chase de Vere’s Patrick Connolly agrees with Luthman that fears of a bubble have been over-blown.

“Is there a bubble in income stocks? I don’t think so, but I think you can have concerns with all the popular areas in the current environment attracting so much money,” he commented.