Fund investors have long been warned by analysts, financial advisers and the like to be wary of the concentration of dividend-generating companies within UK equity income funds.
With only eight companies generating half of the UK dividends, fund managers in this space have had a very small universe of stocks to pick from. A closer look at the top ten holdings of UK equity income funds will reveal a high overlap of names, including the likes of Vodafone, GlaxoSmithKline, Royal Dutch Shell, AstraZeneca, HSBC and BAT.
And with a quarter of the FTSE All-Share's dividend output coming from one sector alone, oil and gas, BP is the other name firmly nestled within the majority of UK equity income funds.
According to financial adviser, Bestinvest, BP is the largest holding in 40 out of 86 UK income funds. Another 23 also have a holding in BP. In some funds, the holding is approaching 10 per cent.
But there are a select number of equity income fund managers who do not hold exposure to the beleaguered oil giant.
Star fund manager, Neil Woodford culled the stock from his Invesco Perpetual High Income and Income funds almost a year ago over fears of a risk to the dividend in a lower oil price environment, and concerns over costs for oil exploration and production harming growth.
"Neil Woodford appears to have made another knock-out decision in structuring his portfolio without BP. His decision to cull the stock from his top picks was taken many months ago once he felt that the costs for oil exploration and production were likely to soar," comments Hugo Shaw, investment adviser at Bestinvest.
Other funds which have steered clear of BP include the Schroder Income Maximiser, which aims to generate above average dividends by giving up some of the growth potential in exchange for extra income. "The managers behind the fund use clever techniques to create this unusual approach and have added extra value by avoiding BP," comments Mr Shaw.
In contrast, co-managers of the Schroder Income Fund, Nick Kirrage and Kevin Murphy, increased their exposure to BP earlier this month, citing the long term investment case of the stock.
Michael Clark, manager of the Fidelity Enhance Income Fund, holds 2.76 per cent in the oil giant, with no BP at all in the Fidelity Income Plus Fund.
"Because we sold early and replaced BP with other income generating shares like utilities and pharmaceutical stocks, we will avoid any cut in the payout of Income Plus this year.
"In Enhanced Income, where we can generate income by covered call overwriting and are therefore less dependent on the dividend, we have held on to some of our BP shares because we believe that the shares have fallen too far."
It seems the funds least likely to be affected by the BP oil crisis, and the likely impact on dividends, are the global equity income funds. These funds look to global earners in their search for dividend payers, and while there is no separate IMA sector (as of yet) for these funds (most tend to fall within the global growth sector) these funds are fast increasing in popularity, with a number of new launches in this space.
Global equity income fund, Elite Bloxham Global Equity Income, managed by Pramit Ghose, has been a top performer in terms of dividend yield. The fund holds no exposure to BP and has not held the stock for some time, with the manager instead preferring Royal Dutch Shell.
"We hold Chevron, Marathon Oil, Royal Dutch Shell and Repsol – making up 6.5 per cent of the Elite Bloxham Global Equity Income Fund.
"This is the beauty of having a global equity income portfolio – you have great choice," comments Shane O'Neill, head of UK distribution at Bloxham wealth managers.
The modestly sized Elite Bloxham fund has managed to outperform the IMA UK Equity income sector average by over 10 per cent. Since its launch in April 2008 the fund has outperformed Mr Woodford's highly regarded Invesco Perpetual high Income fund. Ghose has a target of growing the fund’s dividend stream between 6 per cent and 8 per cent in 2010.
Another global equity income fund with no exposure to BP is Somerset Capital's Emerging Markets Dividend Growth Fund. The fund, which was launched in March this year, has a projected yield of 4.2 per cent, despite having 0 per cent exposure to oil and gas.
