Majedie UK Income, Neptune Income and Unicorn UK Income are among a handful of highly-rated funds that hold very few, or even none, of the most popular blue-chips in the IA UK Equity Income sector.
According to data from FE Analytics, the top five most popular stocks held by UK income funds are GlaxoSmithKline, BP, AstraZeneca, HSBC Holdings and Imperial Tobacco. Completing the top 10 list are Royal Dutch Shell, British American Tobacco, Aviva, Legal & General Group and BT Group. 
While many of these blue-chip stocks are paying attractive dividend yields which are in some cases in excess of 6 per cent, there has been some worry about funds becoming too reliant on so-called ‘bond proxies’ due to the negative impact a rising rate environment is likely to have on them.
Rathbones’ David Coombs (pictured) told FE Trustnet last month that he was worried about a yield trade sell-off, following increased volatility in large-cap dividend-paying stocks.
“Bond proxy-type stocks have started to become a bit more volatile – we’re starting to question at last whether these valuations are a bit stretched. Also, you’re seeing higher volatility in bond markets and it just feels that the end is in sight in terms of the never-ending rise in these sorts of stocks and asset classes,” he said.
Despite some investors edging away from the IA UK Equity Income sector because of similar worries, there are funds that provide solid returns, an attractive dividend and whose top 10 holdings bear very little correlation to that of the majority.
Needless to say, small-cap funds and multi-cap funds with a smaller companies focus fall into this category.
The five FE Crown-rated Marlborough Multi Cap Income fund, managed by Siddarth Chand Lall since its launch in 2011, currently yields 4.2 per cent and has almost doubled the performance of its peer average in the IA UK Equity Income sector since launch.
Performance of fund vs sector since launch
Source: FE Analytics
The fund holds 56 small-caps, 26 mid-caps, 10 micro-caps and just eight large caps, as well as one mega-cap. The £1.2bn fund’s largest weightings are in the financials, industrials and services sectors, and none of the fund’s top 10 holdings are the 10 most popular blue-chips.
Five FE Crown-rated Unicorn UK Income also doesn’t hold any of the 10 most-popular stocks in its top 10, which consists of stocks that managers Fraser Mackersie and Simon Moon believe to be undervalued.
As such, many of the fund’s stocks are small or mid-caps, which are chosen through a bottom-up stock selection process. While the fund has drastically outperformed since launch, the current managers have only been in charge of the fund since the passing of former manager John McClure last year.
However, the co-managers are adopting the same approach as McClure. The fund is currently yielding 5.19 per cent.
Five FE Crown-rated Montanaro Equity Income and PFS Chelverton UK Equity Income have also side-stepped large caps in favour of stocks that are further down the market cap spectrum and have none of the top 10 most popular stocks in their top 10 holdings. Both funds have outperformed their sector average since launch and yield 3.5 and 3.33 per cent respectively.
CF Miton UK Multi Cap Income has also outperformed, has five FE Crowns and yields 3.81 per cent. The fund, managed by Martin Turner and Gervais Williams, holds a 36.2 per cent weighting in AIM stocks and 19.2 percent in FTSE Small Cap stocks. However, it holds a 1.35 per cent weighting in Aviva, placing the popular stock seventh in its top 10 list.
However, funds that invest in large-caps and have an unusual list of top 10 stocks are harder to come by. Majedie UK Income has five FE crowns, is co-managed by FE Alpha Manager Chris Reid and has made it onto the FE Research Select 100 list.
The £974m fund has only two of the 10 most-popular blue-chips in its top 10 holdings – Aviva and Legal & General Group. Since its launch in December 2011, it has provided a total return of 102.37 per cent, outperforming its sector average and FTSE All Share benchmark by 40.23 and 52.17 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Despite its low correlation to the top 10 stocks, it also holds large caps that are creeping up the popularity charts such as Rio Tinto and BHP Billiton.
Similarly, Neptune Income holds UK stocks that are starting to grow in popularity such as Apple. It also holds just two of the 10 most-popular stocks – HSBC Holdings and Imperial Tobacco Group.
While the £293m fund, managed by Robin Geffen, has underperformed its peer average and benchmark over three, five and 10 years, its main aim is to provide a rising level of income. Currently, the fund yields 4.35 per cent and has a clean ongoing charges figure (OCF) of 0.83 per cent.
Neptune Income has been awarded a Square Mile rating of ‘A’ due to its strong and sustainable dividend growth.
The Square Mile research team said: “We have a healthy regard for Neptune's investment team and collegiate approach. Whilst it has proven successful over the longer term, the high conviction approach can occasionally lead to volatility of returns both in relative and absolute terms.”
There are only two other funds in the IA UK Equity Income sector that hold only two of the top 10 most popular stocks in the top 10 and have achieved either a five FE Crown rating, a Square Mile rating or have made it onto the FE Research Select 100 list.
One of them is Querns Monthly Income, which has five FE Crowns and yields 4.1 per cent. Co-managed by Stephen Whittaker and James Lynch, the £13.3m fund holds BP and HSBC Holdings in its top 10 at third and fourth place respectively.
The fund has also delivered a top-quartile return of 54.71 per cent over three years, outperforming its sector average by 8.04 percentage points.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The other highly-rated fund that holds two of the most popular stocks is the five FE Crown-rated MGTS Ardevora UK Income fund, which primarily aims to achieve growth with a bias towards income.
The £215m fund’s top 10 holdings are mostly mid-caps, with Cable & Wireless Communications, Next and Greene King filling the top three positions. However, the fund also holds Royal Dutch Shell and British American Tobacco.
MGTS Ardevora UK Income yields 3.3 per cent, has delivered top-quartile returns over six months, one year and three years, and has managed to outperform its peer average by 24.54 percentage points since launch, providing a total return of 72.41 per cent.
Other funds that are worthy of note with only three of the top 10 most-popular stocks in their top 10 holdings are Liontrust Macro Equity Income, Trojan Income, MFM Slater Income, Premier Optimum Income, Evenlode Income, Standard Life Investments UK Equity Income and Standard Life Investments UK Equity Income Unconstrained.
