UK income investors at risk of owning the same shares  

There is high degree of overlap between the portfolios of the UK’s largest income-focused investment funds and trusts.

Funds and Investment Trusts June 23, 2020 by Tom Bailey

Investors looking for income often opt for income-focused investment funds or trusts. Skilled managers, they hope, will provide the most optimal weighting to the best dividend paying stocks. At the same time, the collective structure of funds and investment trusts mean they allow investors to easily gain the safety of diversification.

Some investors, however, in pursuit of further diversification or attempts to bet on several horses (or fund managers), may opt for multiple income funds. Those doing so, however, risk buying funds with highly similar holdings, cancelling out any potential benefits.

As new research highlights from interactive investor (Money Observer’s parent company), there is high degree of overlap between the portfolios of the UK’s largest income focused investment funds and trusts. This means an investor in several income focused funds or trusts may end up holding roughly the same stock exposure through several different fund managers.  

For example, the research found that drug companies GlaxoSmithKline and AstraZeneca both featured in the top five holdings of Britain’s 10 largest UK equity income funds and investment trusts.

When it came to just funds, GlaxoSmithKline, Imperial Brands, BP, Phoenix Group, and AstraZeneca were all held in the 10 largest funds in the Investment Association’s (IA) UK equity income sector.

Meanwhile, among the 10 largest UK equity income investment trusts, the top five shared favourites are: British American Tobacco, GlaxoSmithKline, RELX, AstraZeneca and Royal Dutch Shell (in rank order).

As Richard Hunter, head of markets at interactive investor, notes: “In an age of ever-decreasing dividend circles, some stalwarts remain. These stocks continue naturally to attract income-seeking funds and trusts.”

However, this is something investors should be aware of when constructing their portfolios. As Teodor Dilov, fund analyst at interactive investor, points out: “More broadly, the overlap of holdings among Britain’s biggest and most loved funds and investment trusts is a reminder of the perils of constructing a diversified income portfolio.

“By investing in a selection of equity income funds or trusts in the belief you are spreading risk, you may find instead that you are replicating your portfolio. So it is important to look carefully under the bonnet of funds to make sure you have the balance that you wish for.”

Investors pay management fees for the funds or trusts they invest in. Therefore, investing in a series of funds or trusts with very similar portfolios means investors end up paying more fees for roughly the same exposure. 

Earlier in the year, research released by Octopus Investments also showed the extent of portfolio crossover among the IA UK equity income sector. The study found that out of the 84 funds in the IA’s UK Income sector, 55 had Royal Dutch Shell in their top 10 holdings.  

The study also showed that GlaxoSmithKline was a top 10 holding of 64 UK equity income funds, while AstraZeneca and British American Tobacco were in the top 10 holdings of 32 funds.

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