Fund buyers have welcomed a move by Neptune to disclose “dividend risk”, but warned that more transparency is needed if investors are to fully understand the sustainability and diversification of a fund’s income stream.
Neptune said last week that it would disclose the proportion of its income funds’ yield derived from the top-10 holdings on its factsheets in order to demonstrate the potential concentration risk.
The firm said it made the move to ensure its investors understood dividend risk and to promote diversified sources of income. It cited Morningstar data that suggested one-third of UK Equity Income strategies rely on their top-10 holdings for more than half of their yield.
Rory McPherson, head of investment strategy at Psigma, welcomed the sentiment, but said the move would not significantly aid fund selection.
“Disclosure is a good thing and in doing so it raises awareness for others,” he said. “When we look at income strategies, we really get into the weeds of where the income is sourced from and sustainability is key. Therefore, it being provided by a manager is not something we’re crying out for.
“Nevertheless, like other risk characteristics managers provide, I think it’s positive,” Mr McPherson added.
Neptune said it was attempting to highlight how a number of UK equity income funds rely on a limited number of stocks for income. The top-10 holdings of its £209m Neptune Income fund, run by founder Robin Geffen, account for 26 per cent of the fund’s total yield. This is despite it holding major payers such as Shell, HSBC and BP among its largest positions.
The same “dividend risk” metric will be applied to the factsheets for its Quarterly Income, US Income and Global Income strategies.
Others suggested the issue is widely known, given the well-documented issues in the UK income market whereby almost two-fifths of the total yield comes from just five stocks.
“It is known, but not on the factsheets. Neptune is bringing awareness to that because they are differentiated from the UK Equity Income sector generally,” said Duncan Blyth of discretionary manager Tcam.
He suggested more data was needed to understand the risk inherent in an income strategy.
“The Neptune fund’s yield is 4.9 per cent – how are they getting that? There are a lot [of] things you have to consider.”
He said disclosing how much yield was derived from specific sectors – or whether the fund was using a particular barbell approach – would also be useful to investors.
“[Concentration] is another important statistic that people need to be aware of, but most would. Clearly, however, what you have to see is how you are getting your income,” he added.
Both Mr McPherson and Mr Blyth suggested that Neptune’s move could catch on in a similar vein to active share metrics, which are not required to be disclosed by asset managers, but are increasingly publicised.
Mr Blyth added: “Those that do not have the concentration issue may follow.”
KEY FIGURES
28%
Drop in FTSE 100 yield when top-10 dividend payers are removed
1/3
Proportion of UK equity income funds relying on top-10 holdings for more than 50 per cent of their yield
