Crooke: Why it’s crucial to diversify your equity income portfolio
The manager had his fingers burnt when BP cut its dividend in 2010 and now makes sure his trust’s yield is derived from as many sources as possible.
Single-stock risk is one of the biggest threats currently facing equity income investors, according to Henderson’s Alex Crooke (pictured)
, who believes managers have a duty to diversify their yield sources.
Equity income funds have witnessed a surge in popularity in the last couple of years but senior industry figures have recently voiced concerns about the large inflows into a small number of companies.
Crooke, who heads up the Henderson High Income Trust
, agrees with them.
"The UK market is very concentrated: 50 per cent of income comes from 38 per cent of the market – I find that too high and I think that is not good for shareholders. That’s why our top-10 give 26 per cent of the income," he said.
Crooke believes company dividends in general will increase next year – particularly in the Asia Pacific and continental Europe. However, he also thinks there is room for higher dividends in the UK market.
"Currently only 40 per cent of earnings are paid out as dividends in the UK compared to a long-term average of 50 per cent," he explained. "Companies have been deleveraging, but now they have the potential to pay out more."
Crooke was himself affected by BP’s decision to cut its dividend in the aftermath of the Deepwater oil spill back in 2010; a factor that Winterflood Securities’ Kieran Drake believes will hold current shareholders of his trust in good stead.
"Of course, diversifying income is a strong strategy," Drake explained. "The trust struggled when BP stopped paying dividends and has now had to look more carefully at a policy of varying its holdings in order to withstand cuts from large companies."
"In addition, the combination of equity and bond holdings has helped diversify the portfolio," he added.
Crooke, who has headed up the trust since 1997 and also runs Bankers Investment Trust
, has considerably outperformed his peer-group composite over five years.
Performance of manager vs peer group over 5-yrs
Source: FE Analytics
He has also outperformed over one and three years, but falls short over 10.
According to FE Analytics
, the four crown-rated Henderson High Income Trust is overweight financials compared with its IT UK High Income sector. However, Crooke says this high exposure, along with its heavy concentration in utilities, is a result of the trust's high yield target.
Henderson High Income currently yields 6.12 per cent, which Crooke says is sustainable. A recent FE Trustnet
study revealed that having an excessive yield often hampers the total return of an equity income portfolio.
Crooke’s Henderson High Income Trust has significantly outperformed its sector average and composite benchmark – split 80/20 between the FTSE All Share and the Merrill Lynch Sterling Non-Gilts All Stocks indices – over three years; however, due to a very poor 2007 and 2008 it has fallen well short over five.
Performance of trust vs benchmark over 3-yrs
Source: FE Analytics
Drake agrees with Crooke about the sustainability of the trust’s dividend.
"We have been impressed with Henderson High Income as its earnings have grown, which means therefore that dividends are covered," he said.
"Although it is not currently a trust that is on our recommendation list, we certainly rate Alex Crooke highly as a manager."
Henderson High Income has a total expense ratio (TER) of 1.96 per cent. It is currently trading on a premium of 3 per cent.