The Government’s plans to allow investors full freedom over when they draw down their pension will hugely diminish the annuities market, a massive blow to the big life insurance sector that has been so popular with equity income managers.
Legal & General shares lost 12 per cent on the news, hurting 93 UK Equity Income funds that hold it in their top 10.
Resolution shares fell 12.8 per cent while Aviva lost 7.6 per cent and Phoenix Group 6.5 per cent.
The insurance industry has been extremely well-held by equity income funds in recent years as they look for non-bank financial exposure.
As well as the 93 that hold Legal & General in their top-10, 38 hold Aviva and 37 Resolution.
Schroder Income was among the funds worst hit by the events, with 5.21 per cent of the fund invested in Resolution and 3.59 per cent in Legal & General.
The £2.7bn Threadneedle UK Equity Income fund is another hugely popular fund that has taken a big hit.
The fund has 3.9 per cent in Legal & General, while the managers also recently told FE Trustnet they had topped up their holding in Aviva and RSA following their recent dividend cuts.
The more concentrated Threadneedle UK Equity Alpha Income fund has a higher conviction bet on the sector, with 5.6 per cent in Legal & General and 3.9 per cent in Aviva.
Both the funds have an excellent recent record, with top-quartile returns over one and three years.
Performance of funds vs sector over 3yrs
Source: FE Analytics
This news is a particularly cruel blow for these funds given events at insurer RSA. Shares lost 30 per cent last November after allegations that accounting irregularities hid losses.
Performance of stock over 1yr
Source: FE Analytics
The fund most exposed to Legal & General is Jupiter UK Growth, managed by Steve Davies, which has 5.9 per cent in the stock.
Davies also holds 5.2 per cent of the Jupiter Undervalued Assets fund in the company.
The manager says it is strong enough to withstand these changes, particularly given the strength of its asset management arm.
Legal & General is also a top-10 holding in two Ignis equity income funds, as well as funds run by SJP and Alliance Trust.
Source: FE Analytics
Schroder Income Maximiser is the fund with the largest position in Resolution, at 5.28 per cent, closely followed by Schroder Income, which has 5.21 per cent.
FE Alpha Manager Martin Walker’s Invesco Perpetual UK Aggressive and Invesco Perpetual UK Growth funds also hold it in their top 10.
Source: FE Analytics
FE Alpha Manager Richard Buxton’s Old Mutual UK Alpha fund has 3.55 per cent in the stock, while FE Alpha Manger Alex Wright’s Fidelity UK Smaller Companies fund has 3.1 per cent in it.
The same manager’s Fidelity Special Situations fund has 2.9 per cent in the stock.
Henderson UK Absolute Return and M&G Dividend are two other notable funds to have top-10 positions in the stock.
Tim Cockerill, investment director at Rowan Dartington, says that the market has over-reacted.
“It’s exactly what the market does: it gets excited and everybody scrambles around.”
Cockerill says that the reaction is particularly illogical given that the details of the changes have yet to emerge. Another sector hit by this year’s Budget is gambling.
The Government has raised the tax on fixed odds betting terminals to 25 per cent.
Ladbrokes has been the hardest hit of the betting companies, because more of its business runs through these machines than over the internet.
It lost 9.27 per cent on the news. According to data from FE Analytics, the only fund to hold the stock in its top 10 is CF Canlife Global Equity.
