Fund picks: The less obvious income choices

This article is part of
UK Equity Income - October 2013

A quick look at the popular dividend stocks among funds in the IMA UK Equity Income sector leaves no surprises – GlaxoSmithKline, Vodafone, Shell, BP and AstraZeneca are the top five.

These income heavyweights all have a historic yield of roughly 5 per cent and generally investors will find at least one of these in the average equity income portfolio. Why? Because they are real stalwarts and for managers it is difficult to avoid including them.

However, there are funds that offer something different – for example, a manager that looks at FTSE 250 stocks or smaller firms – and these can help provide an extra layer of diversification to an income-seeking investor.

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Andy Parsons, head of investment research and advisory services at The Share Centre, picks:

Standard Life UK Equity Income Unconstrained fund

Manager Thomas Moore has a nice strong focus in the FTSE 250 range, currently having roughly 46 per cent exposure to FTSE 250 stocks. He has 40 per cent in the FTSE 100, but none of the five most popular stocks appear in his top-10 holdings. The fund currently yields 3.45 per cent, but the fact that it is unconstrained means Mr Moore can look wherever he likes for opportunities. He is really trying to avoid these stalwarts.

Unicorn UK Income fund

It is surprising this fund doesn’t get more attention. John McClure’s track record is exemplary, although he does have a slightly lower yield than others at 2.57 per cent. Looking at the top-10 holdings, there isn’t a single one in the FTSE 100. He is a manager who is actively seeking – with a highly concentrated portfolio of 48 holdings – income much further down the market-cap spectrum. As soon as you go down that market cap you are into less researched areas, you haven’t got as many followers and you can really differentiate a portfolio.

JO Hambro UK Equity Income fund

Managed by Clive Beagles and James Lowen, this fund doesn’t need much introduction. It is the biggest of these five funds recommended here and it has the highest current yield at 4.6 per cent. These two managers have got a proven track record and have been together as a team for quite some time.

Marlborough Multi-Cap fund

The fund has only been going since June 2011 and is managed by Giles Hargreave and Siddarth Chand Lall. Since launch, it has established a good track record. As its name suggests, the managers can select from up and down the cap scale. This fund currently has a little more than 60 per cent in the small- and micro-cap area. It means you are not going to get big holdings – the average top-10 holding is only 1.5-2 per cent. The managers do this to protect the downside, but it also means the fund has a lot of holdings.

Schroder Income fund

I like the managers Nick Kirrage and Kevin Murphy. In the top 10 it has AstraZeneca, Vodafone and BP, but it also has some you wouldn’t expect, like Lloyds and Barclays. What it is showing is that some of these income funds do invest in companies where there are no yields. In this case, there is an expectation that a yield may possibly come from the banks, but in other cases it could be that the managers are using stocks to help capital growth.