The likes of BP, GlaxoSmithKline and Legal & General are the UK dividend ‘stalwart’ stocks most sold by fund managers in the IA UK Equity Income sector over the past six months, according to research by FE Trustnet.
Since the FTSE 100 hit an all-time high of 7,104 points at the end of April this year, the UK equity market has been on a general downward tredn, heightening to a freefall in August’s Black Monday selling.
In contrast to the first four months of the year, this six-month period has been characterised by a broadly risk-off tone from global investors as well as concern that rapidly slowing Chinese economic growth will be enough to cause the next major economic crisis.
Looking more closely, of the three indices that make up the FTSE All Share it has been the FTSE 100 that has borne the brunt of the selling. The FTSE 250 and the FTSE Small Cap indices are only slightly down and have spent most of the year in positive territory.
Performance of indices since 27 April 2015
Source: FE Analytics
This has weighed heavy on fund managers in the popular IA UK Equity Income sector, who tend to mostly buy large caps due to their apparent strength in prioritising dividends as well dividend growth. These are key strengths for anyone paying out income regularly.
However, managers have been doing a fair bit of selling too and the current cash level of the average fund in the sector is at its highest it has been for at least three years at 4.79 per cent.
Beleaguered BP and GlaxoSmithKline are the most reduced positions, with the average fund having gone from overweight to underweight over this six-month period.
Just 11 out 84 funds, or 13 per cent, are now overweight BP and just one fund – the £6.7bn Artemis Income fund – is overweight GlaxoSmithKline.
BP has been hit by the weakness in the oil price and worries that this puts its much sought-after dividend in peril. Its yield has risen to nearly 8 per cent off the back of the latest round of selling.
Much of the weakness for GlaxoSmithKline centres on concern for its research & development pipeline, as investors fret about how many drugs it can bring to market in the next five years or so.
According to FE Analytics, while the FTSE All Share is down 7.9 per cent since April’s high these two stocks have much harder.
Performance of stocks and index since 27 April 2015
Source: FE Analytics
In an article this morning, FE Trustnet looked at the UK equity income funds which have the largest exposure to the FTSE 100 companies that a recent report from Capita Asset Services – its latest Dividend Monitor – warned could have to cut their pay-outs next year.
Tim Guinness, manager of the $200m Guinness Global Energy fund, thinks the weakness in the likes of BP will not last as a recovery kicks in over the next few years.
“Anybody who has held BP and Shell over the past 18 months would be mad to sell them now, they will recover,” he said.
“They won’t have the best upside [of oil-related stocks] but they have got the protection as inside BP and Shell there are refining businesses that don’t get hurt by a weak oil price,” he added.
Neil Woodford is one manager in the IA UK Equity Income sector who has bucked the trend and not only kept his exposure but upped his holding to GlaxoSmithKline to 6.11 per cent of his £7.1bn CF Woodford Equity Income.
The stock forms a core part of the portfolio with Woodford believing its pipeline, which includes some diversification away from pharmaceuticals to healthcare and vaccines, is solid.
“As is often the case over shorter time periods, fundamentals have played no part in these moves. When this happens, the logical thing to do is to buy more, which is exactly what we have done,” Woodford’s spokesman said of healthcare recently.
Legal & General is another stock Woodford has been adding to owing to its weakness but it too is one of the most sold by UK equity income managers along with asset management firm Intermediate Capital.
While Legal & General has seen its share price decline since April, Intermediate Capital (the only non FTSE 100 stock to make it onto the list of the top five most sold stocks, being in the FTSE 250) has been moving steadily up, continuing a trend over the past year that has seen it gain over 50 per cent.
Performance of stocks and index over 1yr
Source: FE Analytics
Friends Life has also disappeared from a number of UK equity income funds’ major holdings over the past six months, although this is down to the company being taken over by Aviva in April.