A series of FE Trustnet articles have recently highlighted the threat of ‘underestimated’ dividend risk
among funds in the UK Equity Income sector, with some multi-billion portfolios relying on one company to deliver more than 10 per cent of their yield
However, there are a growing number of managers who do not rely heavily on the likes of GlaxoSmithKline, HSBC and Shell, preferring instead to spread their income across a greater number of companies.
Here are five funds you may wish to consider for your portfolio:
Unicorn UK Income
This FE five crown-rated fund tops the entire sector over a three and five year period, with returns of 86.98 per cent and 34.27 per cent respectively. It currently has a yield of 4.57 per cent.
It has a small to mid-cap focus, with only a handful of FTSE 100 companies across the portfolio. The fund’s biggest holding is VP which, with a yield of 4.5 per cent, contributes to around 5.4 per cent of the overall yield if it was bought at the current price.
The £42m portfolio is headed up by FE Alpha Manager John McClure
. It has a minimum investment of £1,000, and a total expense ratio of 1.6 per cent.
Speaking to FE Trustnet in May McClure said: The likes of Vodafone, HSBC, GlaxoSmithKline, Shell and BP account for around half of the total number of dividend payments in the UK. If one of these were to ‘do a BP’, investors would see their income payments suffer a massive blow.”
The fund has more of a large cap focus than McClure’s, but manager Francis Brooke
has capped any one company to a dividend contribution of 5 per cent. Vodafone is the manager’s biggest holding, but with a weighting of 4 per cent it only contributes 4.88 per cent to the fund’s yield, which currently stands at 4.34 per cent.
“The market is difficult, since the top-10 dividend payers account for more than 50 per cent of the total market share. We’ve sought to get this down to a third in our portfolio,” Brooke explained.
The manager says he’d struggle to achieve this if the portfolio got any larger than £2bn assets under management (AUM). The fund size currently stands at £620m – more than double where it was a year ago.
Performance of fund versus sector and benchmark over 5yrs
Source: FE Analytics
With returns of 28.93 per cent, Trojan Income is second only to McClure’s portfolio over five years; however, it’s been significantly less volatile.
The five crown-rated fund has a TER of 1.05 per cent, making it one of the cheapest in the sector.
Acuim UK Multi Cap Income
Small-cap focused manager Gervais Williams
is usually associated with pure growth portfolios, but he made the move into the equity income market following the launch of this product in October last year.
Commenting on last week’s FE Trustnet study, Williams said:
“I think you’re onto something here, but I fear it could be even worse for funds that hold more than one of these big yielders in the same sector. If, for example, speculation in oil sent the price plummeting, you’re going to see big problems for BP, Shell and even BG, which have a massive presence in the [UK Equity Income
Acuim UK Multi Cap Income is particularly diversified, with the top-10 holdings only accounting for 15 per cent of assets under management. Around a third of the portfolio is invested in the FTSE 350, a further third in the FTSE AIM, and the remaining third in small caps and fledglings.
Performance of fund versus sector and index since launch
Source: FE Analytics
Since launch, the fund has returned 7.13 per cent, marginally outperforming its sector average and benchmark.
“The fund has acted very differently from the market which is what we’re looking to achieve,” he said. “Prior to 2011 this kind of product was in a minority area, but since BP it’s been taken more seriously.”
The fund has a minimum investment of £1,000, a yield of 3.48 per cent and a TER of 1.71 per cent.
PFS Chelverton UK Equity Income
The fund is a direct competitor to Unicorn UK Income, though managers David Horner
and David Taylor
have said that they categorically will not hold a FTSE 100 company in their portfolio.
Big losses in 2008 means that the fund lags its benchmark over five years, but it’s a top-decile performer over three years, with returns of 67.02 per cent. With a one year historic yield of 6.73 per cent, it’s also one of the highest yielders in the sector.
Moneysupermarket.com is currently Horner and Taylor’s biggest holding, accounting for 2.38 per cent of AUM.
“All of our stocks contribute [to the yield], and none make up more than 5 per cent of the total dividend,” Taylor said in a recent interview with FE Trustnet.
The £34.6m fund has a minimum investment of £1,000 and a TER of 1.25 per cent.
Marlborough UK Multi Cap Income
FE Alpha Manager Giles Hargreave
who, like Williams, is usually associated with pure growth funds, launched this portfolio in July 2011.
It’s very similar to Acuim UK Multi Cap Income, in that it’s extremely well diversified with more than 150 holdings, and holds a mixture of small, mid and large cap companies. Vodafone is currently its biggest position with a 2 per cent weighting, though this is the only FTSE 100 company in the top-10.
According to FE data, its returned 1.7 per cent since its launch, compared to losses of 3.86 per cent from its FTSE All Share benchmark.
Marlborough UK Multi Cap Income has a minimum investment of £1,000, a yield of 4.19 per cent and a TER of 1.55 per cent. In a recent interview with FE Trustnet, Hargreaves Lansdown’s Richard Troue selected the £129m as an ideal starting point for a first time investor.