Star fund manager, Neil Woodford is one of a few fund managers in the UK equity income space with no exposure to BP.
Close to 50 per cent of UK income funds have BP as the largest holding in their portfolio, however Mr Woodford, who manages the highly successful Inveso Perpetual High Income and Income funds and Higher Income Fund culled the stock from his top picks almost a year ago.
Mitch Fraser-Jones, UK product director at Invesco Perpetual, says Mr Woodford who held around 8 per cent of his main portfolios in BP at the end of 2008, sold half of this in the beginning of 2009, selling off the remainder in June/July 2009.
"The main reason for sale was growing risk to the dividend in a lower oil price environment. Oil majors face difficult decisions about use of cashflow. Our fear was that either capex budgets would be cut harming future growth prospects or the dividend would be cut harming shareholder returns," he said.
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 Hugo Shaw, investment adviser at independent financial advisers (IFA), Bestinvest.
Michael Clark, manager of the Fidelity Enhanced Income Fund, holds 2.76 per cent in the oil giant, with no BP at all in the Fidelity Income Plus Fund.
He comments: "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 are 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."
The concentration of dividend-generating companies within UK equity income funds, sees 40 out of 86 UK income funds having BP as their largest holding. Another 23 also have a holding in BP. In some funds, the holding is approaching 10 per cent.
Global Equity Income Funds which seek returns from a portfolio of global earners have been better placed to seek a diverse spread of dividend paying stocks. The Elite Bloxham Global Equity Income Fund, managed by Pramit Ghose, holds no exposure to BP and has not held the stock for some time, preferring Royal Dutch Shell instead.
"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 also 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 this year.
Another global equity income fund, Somerset Emerging Markets Dividend Growth Fund, launched in March 2010, has a projected yield of 4.2 per cent, despite having 0 per cent exposure to oil and gas.
