Diversify dividend risk with LF Miton UK Multi Cap Income

For this reason it is more important than ever to diversify your sources of income. One way to do this is LF Miton UK Multi Cap Income Fund (GB00B4M24M14), which invests in companies of various sizes. It has a third of its assets in Alternative Investment Market (Aim) shares, 13 per cent in FTSE Small Caps and 12 per cent in the FTSE 250, with only 20 per cent in the FTSE 100.

The fund also has an active share of 84 per cent compared with the FTSE All-Share Index, a measure of how different a fund's holdings are to an index. The higher the percentage, the more the fund differs from the index.

LF Miton UK Multi Cap Income has an attractive yield of 4.1 per cent and has also delivered strong total returns, beating the Investment Association (IA) UK Equity Income sector average over one, three and five years. It also beats UK indices including the FTSE 100, FTSE 250 and FTSE All-Share over those periods.

The fund's highly experienced managers include Gervais Williams, a small-cap income specialist who has worked in fund management for 32 years. He and co-manager Martin Turner aim to grow the fund's dividends at a faster rate than its sector peers, so look to invest in companies that can provide a good and growing income. Fees and costs are charged against capital so that all dividend income can be paid to investors.

The fund is well diversified with 149 holdings, so even if one of these cuts or cancels its dividend it still has many others to rely on. The diversification also helps mitigate its exposure to riskier areas such as Aim shares.

LF Miton UK Multi Cap Income holds a FTSE 100 put option which gives it the right to sell this index at an agreed price before September 2019. The fund's managers hold it to limit losses in the event that markets suffer a significant setback. The FTSE 100 put option covers 40 per cent of the fund.

Its managers are fairly cautious at the moment and look to invest in shares with a degree of resilience. For example, some holdings are less affected by economic headwinds because they dominate a small market niche, some have lower entry valuations because they are overlooked on account of their scale, and others operate in sectors that are under-represented in mainstream indices.

Smaller companies are typically more exposed to the domestic economy, which could be negatively impacted as a result of the UK's departure from the European Union (EU), scheduled for 2019. Smaller and Aim-traded companies can be higher risk and more volatile than their larger counterparts listed on the main market. 

And use of derivatives such as put options adds to costs, which eat into returns, and if the FTSE 100 doesn’t fall below a certain level before September 2019 the put option will become worthless.

However, the fund's managers have proved their ability to pick the right companies and avoid problematic ones, so it will not necessarily follow all the fluctuations of smaller companies indices. And the FTSE 100 put option could mitigate downside around events such as the UK's departure from the EU.

So if you have the long-term investment horizon and high risk appetite necessary for exposure to the types of companies this fund holds, LF Miton UK Multi Cap Income looks like a good way to get UK equity income without high exposure to large-cap companies. Buy. LW

LF MITON UK MULTI CAP INCOME FUND (GB00B4M24M14)

Source: Morningstar, *Miton

Performance

Source: Hargreaves Lansdown/FE as at 9 April 2018

Top 10 holdings as at 28 February 2018 (%)

Source: Miton

Sector breakdown (%)

Source: Morningstar at at 31/03/18