UK equity income funds are nearing single stock limits on key holdings, causing concentration risk fears to mount, but which funds are taking the biggest bets?
New research compiled by IFAonline's sister title Investment Week using FE data highlights the large positions taken by some of the biggest funds, with managers in the sector approaching the maximum permitted allocation to individual stocks of 10% for a UCITs fund.
They are also holding significant overweights to certain names relative to the FTSE All Share.
With many funds taking the same big positions, some managers in the UK Equity Income sector have started to reduce holdings to avoid a BP-style collapse which caught out some managers previously.
Many of the top stocks in these funds are common overweights in the sector. These include AstraZeneca, which is at least a one percentage point overweight in 32 of the 93 funds in the peer group versus the 2.09% index allocation, and GlaxoSmithKline, the most widely held stock.
Neil Woodford’s £10.6bn Invesco Perpetual Income and £14bn High Income funds each hold 9.2% in AstraZeneca and around 9% in GSK, and his £1.3bn St James’ Place UK High Income fund has nearly 10% in AstraZeneca, as well as 9.5% in GSK and 7.7% in BAT.
The £2bn Jupiter Income trust holds 8.7% in AstraZeneca, while both the £2.3bn Newton Higher Income and the £623m BlackRock UK Income funds allocate large parts of the portfolio to BAT and Royal Dutch Shell, and Newton’s fund also holds 6.4% in GSK.
Richard Wilmot, manager of the Newton fund, said this sector concentration can be attributed to the fact there are not many large companies in the UK market that offer a high yield, which causes a natural bias towards the top ten stocks in income portfolios.
According to Newton’s estimates, around 19 stocks currently make up half of the FTSE All Share value and around 12 stocks make up 50% of the FTSE All Share market yield.
In the past, some fund managers have suffered hefty losses from having such large weightings.
For example, back in 2010, the Newton Higher Income fund, then managed by Tineke Frikkee, paid dearly for having an 8.2% stake in BP when the shares dived following the Deepwater Horizon disaster.
However, since replacing Frikkee in December 2012,Wilmot has been reducing the concentration risk of the portfolio, and now the top ten holdings make up 42.5% of the fund, down from 54.5% at the end of December.
“I was able to do this because I do not own any low yielding stocks, so all the holdings make a contribution to the overall yield of the portfolio,” Wilmot said.
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