Fund managers should be doing more to reveal how well covered the yield from their top 10 holdings is, according to Neptune Investment Management’s Robin Geffen. 
The Neptune founder and chief executive (pictured) said IA UK Equity Income fund managers could do more to let investors know how secure the income is.
Geffen has previously raised concerns over dividend risk within income investors portfolios, but said few people were talking about dividend cover.
Indeed, the manager has made a number of stock-specific disposals from his Neptune Income fund based on concerns over dividend sustainability, including holdings in ITV, AstraZeneca and BT.
He said: “At the moment we have the second highest level of dividend cover and I sleep very well on behalf of myself and my unitholders. People are not talking about this and they should be.”
Dividend cover in the fund stands a 1.99x, according to Neptune, which rises to 2.65x for its top 10 holdings. In comparison, dividend cover for the average IA UK Equity Income fund’s top 10 holdings is 1.46x.
“When I came into the industry one of the first things we looked at was dividend cover especially as we’re moving into uncertain times,” he said.
“Everybody should be doing everything we can to provide you with this figure, we’re going to be doing so going forward.”
Having previously flagged the issue of dividend concentration and risk, Geffen said the problem had come into greater focus during the sell-off in markets during the early part of this year.
Geffen said the top 10 holdings within the Neptune Income fund account for just 28 per cent of its yield, compared with 43 per cent for its average peer in the IA UK Equity Income sector.
The fund manager said that 29 per cent of the sector’s funds rely on just one company to deliver at least 10 per cent of its yield, while two-thirds rely on oil giants BP and Royal Dutch Shell to deliver the same amount.
“We saw a direct correlation between dividend risk and performance during the February sell-off,” he said. “The bottom quartile of performers had the highest dividend risk [between 12 January and 9 February].”
The manager added: “Yield concentration leaves you much more vulnerable to market shocks.”
This was particularly important when considering the tobacco sector, a key source of dividends for some income managers, said Geffen, as it has seen a sharp sell-off since the start of the year.
According to the veteran investor, Imperial Brands and British American Tobacco combined make up 7.3 per cent of the yield generated by the UK equity income sector, which has a universe of around 900 stocks.
As such, around 57 percent of UK equity income funds own both stocks, while 72 per cent hold at least one.
“That’s a phenomenal concentration from two stocks,” he said.
Performance of stocks YTD
Source: FE Analytics
Indeed, the manager owns only half of the most commonly held income stocks by the sector.
The manager is currently overweight materials, technology and financials within the portfolio, with much of his exposure coming from overseas.
He said: “Technology is a bit of a bugbear of mine because in the UK it accounts for less than 2 per cent of the market. In Europe it is 7 per cent and in the US it is 25 per cent in its purest form.
“But then you start to realise that things like Amazon are actually considered discretionary.”
Indeed, taken altogether technology represents around half of the market capitalisation of the US market.
One of the fund’s top holdings is Microsoft, which has made inroads into the cloud computing space with revenues growing at around 100 per cent year-on-year.
The largest underweights are to consumer staples and discretionary sectors as the manager remains unconvinced by the health of the UK consumer and increased levels of economic and political uncertainty surrounding Brexit.
“If you look at where the revenue arises in my portfolio you will see there is only a very small proportion that arises in the UK,” said Geffen. “I’m not interested in UK domestics and particularly not in UK domestic cyclicals.”
He added: “Whichever side of the line you stand on, the whole idea of what should happen with Europe is probably different from just about everybody else’s. It is very divisive, it isn’t going away anytime soon. It’s an issue that hangs over the UK in terms of uncertainty.
“Global growth we’re very positive about but investment in the UK is a major issue.”
Indeed, overseas exposure sits at around 19 per cent close to the maximum 20 per cent permitted under the Investment Association’s UK equity income sector classification.
Other key underweights include healthcare, where the manager sees a pricing headwind under populist US president Donald Trump.
At a sector level, the main shift within the portfolio has been towards commodities exposure, with the manager increasing allocation to large-cap miners due to attractive valuations and dividend profiles. Elsewhere he has increased exposure to industrials as a way of taking advantage of the global growth trend.
Performance so far this year has been driven by strong sector allocation, Geffen said, who noted the positive impact of underweight positions to energy and consumer staples stocks.
To 4 May, the fund was up by 1.16 per cent, compared with a 0.09 per cent loss for the FTSE All Share benchmark and a 0.15 per cent loss for the average IA UK Equity Income sector peer.
Geffen manages an equally-weighted, concentrated portfolio of 30-40 stocks in the Neptune Income fund, targeting a rising level of income with the potential for some capital growth.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch at the end of 2012, the fund has delivered a total return of 311.45 per cent compared with a gain of 285.21 per cent for the FTSE All Share benchmark and a 273.08 per cent gain for the average IA UK Equity Income fund.
Neptune Income has an ongoing charges figure (OCF) of 0.86 per cent and a yield of 3.65 per cent.