Research from Octopus Investments shows the proportion of funds holding Royal Dutch Shell in their top 10 holdings fell by nearly half after its dividend cut — from 65 per cent in March to just over a third (36 per cent) by the end of May.
Shell’s investors were in line to receive £3.8bn in dividends for Q1 2020, but a dividend cut in April knocked £2.4bn from the total, leaving investors with a £1.3bn payout.
Meanwhile typical income stocks such as Lloyds Banking Group, HSBC and Legal and General, have fallen out of the 10 most popular equity income companies as they were forced to hold back on payouts, and were replaced by Imperial Brands, Relx and Phoenix Group.
Managers also appeared to be preempting potential dividend cuts. The proportion of funds holding BP, which is yet to cut its dividend, has fallen from 61 per cent to 43 per cent.
The Bank of England strongly suggested banks and insurers suspended their dividends during the coronavirus crisis while the government mandated any firm using a support scheme should not be paying out funds to shareholders.
| March | May | ||
| Stock | As a % of other funds | Stock | As a % of other funds |
| GSK | 76% | Glaxosmithkline | 80% |
| Royal Dutch Shell (A&B) | 65% | British American Tobacco | 46% |
| BP | 61% | BP | 43% |
| Astrazeneca | 38% | Astrazeneca | 37% |
| British American Tobacco | 38% | Rio Tinto | 37% |
| HSBC holdings | 30% | Royal Dutch Shell | 36% |
| Legal and General | 29% | Imperial Brands | 32% |
| Rio Tinto | 27% | Phoenix Group | 31% |
| Unilever | 25% | Relx | 30% |
| Lloyds Banking Group | 24% | Unilever | 29% |
| Source: Octopus Investments | |||
As the coronavirus crisis hit company balance sheets over the past three months, hundreds of firms have culled or slashed their dividend payouts to shareholders in an attempt to form a cash buffer against the economic impact of the pandemic.
Income investors have been left with at least a £32bn shortfall, according to AJ Bell.
Chris McVey, manager of the Octopus UK Multi-Cap Income fund, said: “As you would expect, income fund managers have had to adapt to the new environment, and many have rebalanced their portfolio in response.”
Concentration risks remain
Despite UK income fund managers shuffling the pack, the overall picture remained the same.
UK equity income funds have long remained reliant on a handful of big payers, creating dividend concentration risk, and a large proportion of funds still rely on the same stocks to generate income.
Glaxosmithkline appears in 80 per cent of the funds’ top 10 holdings, while more than a third of UK equity income portfolios hold British American Tobacco, BP, Astrazeneca, Rio Tinto and Shell in their 10 largest stocks.
Mr McVey said: “Given how important this income is for the millions who use it to supplement their pensions, the dividend cuts of recent months should demonstrate the need for genuine diversification.
“However, as this data shows, simply investing in different income funds won’t necessarily give you diversification. This makes it crucial to look closely at the underlying holdings.”
Mr McVey said Octopus’s multi-cap approach showed diversification was possible and provided the opportunity for investors to benefit from the “significant number of companies” capable of generating attractive income, particularly further down the market cap spectrum.
The Octopus UK Multi-Cap Income fund’s largest holding, Games Workshop Group, is held by just 2 per cent of other UK equity income funds.
Its largest dividend concentration risk is Strix, its sixth largest holding, which is held by seven other funds.
imogen.tew@ft.com
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