UK equity income funds have maintained the same number of holdings over the past decade, according to analysis by Investment Adviser that comes as fund selectors grow more concerned about dividend concentration risk.
Morningstar data analysed by Investment Adviser has shown that the average number of holdings in UK equity income funds has remained consistently around the 55 mark since 2008.
Given the stock number has stayed the same, and the UK dividend market itself has become more condensed, concentration within funds is likely to have increased.
The FTSE All-Share index is highly concentrated in terms of income, with 15 stocks accounting for more than 80 per cent of total dividends, according to the latest Capita Dividend Monitor report.
Ryan Hughes, head of fund selection at AJ Bell Investments said managers were unlikely to shift away from established processes, but acknowledged the challenge facing investors.
He said: “Dividend concentration risk is far more pertinent. We still see this. The UK market is a higher dividend market, but a narrow range.
“You cannot get away from the fact that the biggest [fund managers] in the market have a focus around the largest companies that pay significant amounts of their dividends.
“That has been a good strategy for the past 15 years, but the market evolves and it is certainly a challenge for these managers to diversify their dividends and ensure they are sustainable.”
In a bid to highlight the risks, Neptune said earlier this year it would publish figures showing how much of its funds’ income derived from individual stocks.
Peter Sleep, a senior portfolio manager at Seven Investment Management (7IM), said the lack of change in managers’ holdings was understandable, despite growing pressure to differentiate. The average of 55 holdings represented a suitable balance between being overly exposed to stock-specific risk and being accused of closest tracking, he said.
He said: “If a portfolio manager had more than 55 stocks they would have their legs slapped for being a closet tracker and fewer than that would represent a bit of a risk. Statistics show you need around 30 to diversify individual stock risk.”
Mr Sleep noted that income managers often struggled to balance yield and dividend growth while also standing out in a crowded sector.
He said: “Fund managers seem to approach these two problems in one of two ways.”
The 7IM manager also highlighted that dividend concentration risk could decrease following rule changes implemented by the Investment Association earlier this year.
The trade body has reduced the yield requirement for funds in its UK Equity Income peer group to 100 per cent of the FTSE All-Share, from 110 per cent.
KEY NUMBERS
50-55
Average number of holdings for UK income funds
80%
Proportion of FTSE 100 All-Share dividends derived from 15 stocks
