Single-stock risk threatens equity income investors
The search for yield is leading UK equity income funds to pile into the same few stocks, increasing the risks to investors.
The huge inflow of money into UK Equity Income funds is creating massive positions in a few key stocks, which could expose the sector to serious risks if problems emerge in these companies and managers rush to draw out their money.
data shows that 81 out of 102 funds – 79 per cent – in the IMA UK Equity Income sector hold GlaxoSmithKline in their top ten, with more than half – 54 – being more than 5 per cent invested in the stock.
Vodafone is a top ten holding for 76 funds, 41 of which have more than 5 per cent invested, while 71 funds – 70 per cent – have both companies in their top ten.
Proportion of funds holding UK stocks
Source: FE Analytics
||Funds with stock in top ten (%)
||More than 3 per cent (%)
||More than 4 per cent (%)
||More than 5 per cent (%)
|Royal Dutch Shell
The largest and most popular funds in the sector are particularly exposed to this risk. Neil Woodford
’s Invesco Perpetual Income
and High Income
funds have more than 5 per cent in AstraZeneca and GlaxoSmithKline, and also hold BAT, BT and Vodafone in their top tens.
, the third biggest fund in the sector, has as its top four holdings GlaxoSmithKline, Royal Dutch Shell, Vodafone, HSBC and AstraZeneca.
Halifax UK Equity Income
holds 7.5 per cent in Shell, 7 per cent in BP, 6.1 per cent in GlaxoSmithKline, 5 per cent in Vodafone and holds BAT and AstraZeneca in its top ten.
Newton Higher Income
holds 8.6 per cent in Shell, 8.2 per cent in GlaxoSmithKline, 6.9 per cent in Vodafone and holds BAT, BP and AstraZeneca in its top ten.
These five portfolios together have £30.07bn of investors’ money under management, much of which is invested by pension funds or those hoping to live off the income from their investments.
AWD Chase de Vere’s Patrick Connolly (pictured
) says investors should think about diversifying their income investments outside of the UK to avoid over-exposure to the same stocks.
“In the past income investors have focused their efforts on UK equity income funds, so have been duplicating their holdings.”
“That trend is changing – one or two funds are moving down the market cap scale in the UK, but a bigger trend and one we are looking at is diversifying into global or individual country income funds.”
“There’s no need to have all your income investments in the UK anymore.”
Our research shows that the search for yield has led managers to concentrate largely on the same few large-cap companies, but recent history shows the danger of such a strategy.
Standard Chartered was the latest FTSE 100 blue-chip to be dragged into a scandal, accused of laundering money for Iran and threatened with the loss of its New York banking license.
The bank had previously been widely praised as the most secure and well-run UK bank, with its business in Asia seen as having the potential to carry the bank through the economic turmoil.
HSBC was recently caught up in a similar money-laundering scandal, and our research shows it features in the top ten of 33 out of 102 funds in the sector.
The Gulf of Mexico disaster that caused BP to cancel its dividend in 2010 is an example of an unexpected “black swan” event hitting an equity income favourite.
The company currently features in the top ten of exactly half the 102 UK equity income funds.
With the massive inflows into these companies from the sectors funds, any rush to sell out would be particularly damaging for the companies and the funds invested in them, whether it was inspired by a “black swan” event or a sudden turning away from the sector of investment fashion.
Funds are currently not required to report more than their top ten holdings, so the degree of convergence of their investments is potentially even higher.
Robert Love, head of research at Asset intelligence, said: “We are careful looking at individual funds in the sector. It’s important to look at overlap in between funds. You have a lot of people chasing after the same stocks.”