- Relx and BP are much liked by stockpickers
- Shell's chunky presence in the index causes a dilemma for all
- Top dividend payers less popular than one might expect
When picking a fund, you should always look under the bonnet at how the portfolio differs from the benchmark and which stocks the managers are betting big on. Comparing the portfolio positionings of a range of funds gives us an idea of which stocks are currently in favour among investment professionals. They don’t always know best but can be a useful source of ideas.
With this in mind, we looked at the top 10 holdings of 12 prominent UK equity income vehicles. These included the seven investment trusts with more than £500mn in assets in the AIC UK equity income sector: City of London (CTY), Finsbury Growth & Income (FGT), Edinburgh Investment Trust (EDIN), Law Debenture (LWDB), Murray Income Trust (MUT), Merchants Trust (MRCH) and Temple Bar (TMPL).
It also included five of the biggest funds in the Investment Association’s UK Equity Income sector: Artemis Income (GB00B2PLJH12), CT UK Equity Income (GB00BDZYJT97), BNY Mellon UK Income (GB00B7M90R07), Jupiter Income (GB00B5VXKR95) and JOHCM UK Equity Income (GB00B8FCHK57).
Favourite stocks
The first chart lists the stocks that featured most often. The second one looks at the top 10 companies in the FTSE All-Share index and shows whether managers tend to really 'bet' on them when they do hold them. Together, they give us an idea of which companies managers favour at present.
Of the top stocks in the index, BP (BP.), Unilever (ULVR), GSK (GSK) and Relx (REL) are some of the most popular. Data giant Relx in particular seems to be a common pick, although the average exposure figure is slightly skewed by it being the biggest holding in Nick Train’s Finsbury Growth & Income, which also skews another average via its large position in Diageo (DGE). The trust is known for its concentrated strategy, with the top 10 holdings making up 84.6 per cent of the portfolio as of 31 January; Relx alone accounted for 12.5 per cent.
The company is considered one of the few ways to play the artificial intelligence (AI) boom in the UK market, returned 36.1 per cent in the year to 8 March and has recently announced a £1bn buyback for 2024. Matt Britzman, equity analyst at Hargreaves Lansdown, notes that Relx’s future growth “is going to be driven by improving data analytics, with the use of AI being a key element”. “Having huge troves of data starts to really shine through when you build and train AI tools on top of it,” he adds.
Shell (SHEL), meanwhile, showcases the dilemma fund managers face when a company makes up a big part of their benchmark. It accounted for some 7.1 per cent of the FTSE-All Share as of 29 February, and in 2023 was the second-biggest UK dividend payer right after HSBC (HSBA), according to Computershare’s UK Dividend Monitor report.
For active managers, both excluding it from the top 10 or going overweight can become huge calls. Six of the analysed funds chose a middle ground, holding it below or at benchmark levels, while BNY Mellon UK Income was the only one to go overweight with a 9 per cent position. This looks relatively punchy for a fund whose other holdings are all below 6 per cent.
Aside from Shell, the top 2023 dividend payers are not particularly prominent in these portfolios. Only three funds hold HSBC in their top 10, all underweight. Glencore (GLEN), British American Tobacco (BATS) and Rio Tinto (RIO) also featured quite sporadically. Together, the five paid £29.5bn-worth of dividends in 2023, a third of the total. Meanwhile, BP, Unilever, AstraZeneca (AZN) and GSK, which were next in the 2023 dividends chart, proved more popular alternatives.
Strategy and concentration
Partly because of Shell, the top 10 stocks account for a significant portion of the FTSE All-Share, some 40 per cent as of 29 February. Most of the funds analysed hover around the same level with their own top 10, but there are a few outliers. Law Debenture opts for a less punchy approach, with a 3.9 per cent exposure to its biggest holding, Rolls Royce (RR.). Portfolio manager Laura Foll recently spoke to the IC about the team's strategy.
Aside from Finsbury Growth & Income, Temple Bar is the most concentrated of the group with 49.3 per cent of its portfolio in its top 10 stocks. James Carthew, head of investment companies at QuotedData, says he finds the trust interesting because “it is the most unashamedly ‘value-oriented’” of the UK equity income trusts, at a time when the UK market is especially undervalued.
Temple Bar’s managers “are convinced that eventually value will be appreciated by investors. In the meantime, the companies that they hold are buying back shares and upping their dividends”, Carthew says.
When it comes to picking a fund, you want to think about how 'active' it is both in terms of ideas and level of conviction in them. Temple Bar also has a top 10 that looks radically different from that of the index: it has chunky positions in Shell and BP, but then focuses on less obvious plays, including a few European stocks such as TotalEnergies (FR:TTE).
The trust’s exposure to the energy sector is well above benchmark at 18.9 per cent. Among open-ended funds, JOHCM UK Equity Income looks radically different from the index; it only holds BP among the top 10 FTSE stocks and bets on the likes of Glencore, Barclays and NatWest instead.
If you prefer a fund that stays closer to the index albeit with an active approach, City of London, which holds seven of the 10 top FTSE stocks all with exposures in the range of 3-4 per cent, could be an option.
Mick Gilligan, head of managed portfolio services at Killik & Co, points out that the trust’s 2 per cent discount to net asset value (NAV) as of 8 March looks attractive, given that the trust has often traded on a premium.
“City of London’s NAV performance has been poor in the year to date, but in my experience periods of underperformance don’t last forever, and a wider discount offers a good opportunity to buy and benefit from an eventual performance turnaround,” he argues.
