One of the major concerns facing UK investors at the moment is the increasingly ominous outlook for dividends within the FTSE 100 as falling commodity prices, poor earnings growth and falling dividend cover have put significant parts of the index at risk of reducing – or completely stopping – their payouts. 
In truth, most of the bad news has originated from the commodity-related sectors – which make up a hefty chunk of the index – but others have warned that dividend cuts could be far more widespread than first expected as many UK blue-chips face structural challenges.
These include the likes of star manager Neil Woodford, who warned earlier this week about the significant dividend risk being seen at the moment.
“In the resources sector there are any number of FTSE 100 companies in the mining space that look like they have low double-digit/high single-digit yields. They clearly haven’t, many of them won’t be paying any dividends let alone cutting significantly. I think you will see dividend cuts coming in the oil sector. I think you will see dividend cuts across the industrial sector and indeed in financials,” Woodford said.
He added: “There are a number of areas to worry about.”
As a result, many market commentators have urged investors to use this as a chance to diversify their income streams away from the concentrated domestic dividend market.
One such destination for those investors has been the IA Global Equity Income sector. Indeed, many funds within it market themselves on the idea that they can offer diversification within a UK-heavy portfolio.
However, FE data suggests that not only are global managers not practicing what they preach, but could also be putting their clients’ portfolios at risk.
According to FE Analytics, for example, the MSCI AC World index – which is one of the most commonly used benchmarks in the peer group – has a 6.56 per cent weighting to the UK, but the average fund in the sector has a 16.75 per cent weighting to FTSE-listed stocks.
Global income funds with the highest weighting to the UK
Source: FE Analytics
As the table above shows, there are eight IA Global Equity Income funds (representing 19.44 per cent of the peer group) that have more than 20 per cent of their assets in the UK – such as Liontrust Global Income (27.52%), Invesco Perpetual Global Equity Income (24.53%) and Henderson Global Equity Income (20.59%).
Investors who therefore blend UK equity income funds with global ones could therefore, without knowing, have highly concentrated exposure to FTSE-listed stocks.
FE data shows, for example, by holding a 50/50 split between the Liontrust Global Income fund and the Vanguard FTSE UK Equity Income Index tracker, they would have 63.64 per cent weighting to the UK equity market.
On top of that, nine of their 10 largest stock positions would be listed in the UK.
George Boyd-Bowman, who holds 10 per cent of his Neptune Global Income fund in the UK, says this is a very concerning trend as it is putting the underlying investors (who is likely to already have exposure to the UK dividend paying-market elsewhere in their portfolio) at risk. 
“We know that one of the key reasons why clients own the fund and, indeed, why they own global income funds is to diversify their source of income outside of the UK. If we go and stuff our portfolio full of UK stocks, we are not being very helpful. That’s something you might think all global income managers would think about, but they don’t,” Boyd-Bowman (pictured) said.
“The average weighting within the sector to the UK is close to 20 per cent so not only is that increasing the chances of overlap between your existing UK holdings, but also its more than double the level of the benchmark.”
“I personally think if you are a global income manager and you feel the need to hold a high proportion in the UK, then I don’t think you are trying hard enough. They are plenty of income ideas outside of the UK out there.”
Of course, one of the major reasons investors will turn to global funds for dividends is to limit the risk of the total income they receive starting to fall.
However, not only do many global income funds have relatively high exposure to UK equities, several now rely heavily on UK stocks both from income and total return points of view.
According to FE data, 72.22 per cent of IA Global Equity Income funds currently hold a UK stock in their list of top 10 holdings. What’s more, 30.55 per cent of funds in the sector have three or more UK stocks in their top 10.
Of course, there are IA Global Equity Income funds that have big bets in UK-listed stocks but the companies they own rarely feature in IA UK Equity Income funds.
An example is Dominic Neary’s Baillie Gifford Global Income Growth, which holds 25.60 per cent in the UK (the second largest in the sector).
While it counts three UK stocks in its top 10, they are Provident Financial, WPP and Hiscox which only feature in 4.8 per cent, 2.4 per cent and 1.2 per cent, respectively, of IA UK Equity Income funds’ lists of top 10 holdings.
It is worth noting though that Neary holds the likes of Rio Tinto, British American Tobacco and Prudential further down his portfolio.
However, there are a relatively high amount of funds that have significant positions in some of the most popularly-held stocks in the IA UK Equity Income sector, as the table below shows.
% of sector constituents that hold UK blue-chips as top 10 holdings
Source: FE Analytics
For example, 16 per cent of IA Global Equity Income funds count Imperial Brands as a top 10 holding, a stock that features in just over half of IA UK Equity Income funds’ top holdings. Other common overlaps between the two sectors include British American Tobacco, HSBC, Vodafone, AstraZeneca and GlaxoSmithKline.
Many more funds, in both the global and UK sector, may have exposure to those stocks outside of their top 10.
Given that many UK large-caps offer high dividend yields – either thanks to share price falls, significant income payouts or fears of dividend risk – it means that certain global funds are highly dependent on UK stocks for their distributions to unitholders.
For example, Veritas Global Equity Income counts British American Tobacco, Capita, HSBC and National Grid as top 10 holdings and they account for 20.6 per cent of FE Alpha Managers Charles Richardson and Andy Headley’s total assets.
However, given the high dividend yields in stocks like HSBC, those four companies currently make-up 22.28 per cent of Veritas Global Equity Income’s running yield of 4.2 per cent.
The same goes for BlackRock Global Income, which currently counts three highly popular UK stocks in the UK space as top 10 holdings – British American Tobacco, AstraZeneca and Imperial Brands. As a proportion of assets, those stocks make up 9.96 per cent of the fund but its yield of 2.77 per cent is currently 15 per cent dependent on those companies.
Though some investors may not see this as a concern and want their global manager to hunt all around the world for opportunities (whether they be in the UK or not), Boyd-Bowman says the industry needs to be far more helpful in that respect.
“Ultimately, we have to provide products that fulfil clients’ needs. I think the industry has been quite bad at that over the last few decades, really, and while it is getting better that is very much front and centre of what we are trying to do in the fund,” he said.
“We are very mindful of why investors want a global income fund.”
As a result, in an article later today FE Trustnet looks at the top-performing global income funds that have very little exposure to the UK equity income market.
