It may come as no surprise that GlaxoSmithKline, AstraZeneca, BP and other well-known large-caps are some of the most widely-held stocks within the IA UK Equity Income sector. 
Blue chip stocks are often a firm favourite with income investors due to their attractive dividends and their low-risk reputation, making them to key to the success of many of the sector’s star managers.
In an article published last week, Lazard’s UK equity manager Alan Custis told FE Trustnet that investors seeking income should ditch small and mid-caps and turn to larger stocks while they are at relatively cheap valuations and their yields are high.
“What is interesting is that we had this post-Greece bounce [in the market], so we’ve seen that macro concern come off large-caps and have therefore seen some of the valuation characteristics start to come back to the fore. Therefore the value as we see at the moment remains in large-cap relative to small,” he said.
It’s easy to see why so many equity income funds hold significant weightings in the same large-caps, with the likes of BP and Royal Dutch Shell offering dividend yields in excess of 6 per cent.
However, with so many funds within the peer group focusing on the same few stocks, investors are being exposed to concentration risk and could find themselves taking an excessive hit if those firms or their wider sector run into headwinds.
For example, the plummet in oil price during the second half of last year led to the peer group composite in the UK oil and gas sector losing 18.67 per cent of its value over the last year and hit the funds owning its members.
Performance of stocks vs sector and index over 1yr
Source: FE Analytics
In March, Franklin Templeton’s Colin Morton warned that the stocks that are popular among UK equity income managers could be forced to cut their dividends in the near future, which would have a drastic impact on the UK dividend paying market.
“What is scary about those four companies – BP, Shell, GlaxoSmithKline and Vodafone – is when you put them together, they make up around 25 to 30 per cent of all the dividends the UK market pays,” he told FE Trustnet.
Despite this, the aforementioned stocks are all in the list of top 20 most popular stocks in the sector out of 262 companies. Investors who are already invested in a ‘traditional’ equity income fund, therefore, might want to look for those that search outside the sector’s usual hunting grounds.
GlaxoSmithKline is the most popular stock among IA UK Equity Income funds, despite dropping in popularity by 14.43 percentage points over the past year. Nevertheless, more than a third of all funds in the sector hold the company in their list of top 10 weightings.
The fund that has the largest weighting in the stock at 7.46 per cent is Scottish Widows Multi-Manager UK Equity Income, which is managed by Lyndon Gill. The £1.5bn fund also holds a substantial 26.2 per cent weighting in Royal Dutch Shell and a 14.1 per cent weighting in BT.
The five FE Crown-rated Evenlode Income fund, which is £312m in size, has the second-largest weighting in GlaxoSmithKline at 5.95 per cent and has performed well, beating its sector average by 17.11 percentage points over five years to deliver a top-quartile return of 86.96 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Other funds that have noticeably large weightings in the stock are HSBC Income at 5.71 per cent, Threadneedle UK Equity Income at 5.7 per cent and Fidelity Enhanced Income at 5.6 per cent.
The second most popular stock in the IA UK Equity Income sector is AstraZeneca, which began underperforming relative to its pharmaceutical peers over the last six months and has lost 8.82 per cent in value.
Despite this, the stock is still owned by 32.99 per cent of funds in the sector – having dipped slightly from 34.02 per cent this time last year.
The pharma giant came under pressure due to falling sales of a number of its drugs. However, things are looking up for the company this week following the announcement that it is selling a cancer treatment called Caprelsa to Sanofi for $300m.
Funds that have the largest weightings in AstraZeneca, which has a dividend yield of 4.29 per cent, are CF Woodford Equity Income at 7.03 per cent, Threadneedle UK Equity Income at 6.6 per cent and Evenlode Income at 6.26 per cent.
CF Woodford Equity Income, which was launched by star manager Neil Woodford last year, has the stock as its top holding, as well as owning a range of other popular dividend-paying stocks in its top 10 including Imperial Tobacco Group, GlaxoSmithKline and British American Tobacco.
Since launch, the £6bn fund has trebled the performance of its sector average, providing a total return of 19.92 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The likes of BP and Royal Dutch Shell are also immensely popular stocks within the UK equity income sector, with 30.93 and 25.77 per cent of funds holding it in their top 10s respectively.
Due to the aforementioned plummet in oil price, the oil giants have dipped in popularity over the last year. One year ago, BP was owned by 40.21 per cent of UK equity income funds but now only 30.93 per cent hold it as a major position; Royal Dutch Shell’s popularity has moved from 38.14 per cent to 25.77 per cent.
However, their current yields are proving attractive to investors, with BP providing a dividend yield of 6.59 per cent and Royal Dutch Shell providing a dividend yield of 6.96 per cent.
Aside from Scottish Widows Multi-Manager UK Equity Income which, as mentioned earlier, has by far the largest weighting in Royal Dutch Shell, other funds that have in excess of 5 per cent of the stock in their holdings include JOHCM UK Equity Income, Premier Income, Halifax UK Equity Income and Premier Monthly Income.
The fund that holds the largest weighting in BP is UBS UK Equity Income at 8.3 per cent. The £3m fund has a high-conviction portfolio of 36 stocks, but has remained in the bottom quartile over one, three and five years.
Other funds that have high weightings in BP are Jupiter Income Trust, HSBC Income and JOHCM UK Equity Income.
But some other stocks are creeping up the popularity charts with UK equity income funds include Imperial Tobacco Group. A year ago, 16.49 per cent of funds had it in their top 10 but this figure is now just under 30 per cent.
Likewise, Aviva was held by just 10.31 per cent of funds but the exposure has now doubled to 20.62 per cent. Managers have also been buying the likes of Prudential, Lloyds and Unilever.
In a future article, FE Trustnet will highlight the UK equity income funds that are investing in different stocks to their typical peer.
