Top Rated UK Equity Income Funds Overlap by a Third

Diversifying between asset managers is not enough - if you hold too many funds in the same sector you double the risk of losing money

Emma Wall 21 August, 2013 | 4:35PM
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In June 2010 investors in the FTSE 100 suffered severe losses due to just one stock. After the Gulf of Mexico oil spill disaster, BP's share price plummeted, and so too did the UK stock market.

Investors who held more than one UK equity fund suffered double the hit - as BP did not just make up 5% of one of their holdings, but in some cases a significant slice of their entire portfolio. 

Investors often buy up several funds in the same sector. Acquired over a prolonged period of time, held in different ISAs or bought because at the time a fund manager’s investment style differed to an existing holding – it is easy build up duplications.

In a wide ranging investment sector this does not matter, one emerging market fund can differ wildly from another – but if you take a look under the bonnet of the top ranking UK equity income funds you may be shocked to see the similarities.

Fund managers’ rhetoric may sound dissimilar – some favour cyclicals, other defensives, some prioritise value while others look for growth stocks – but when it comes to paying dividends there are a few key players.

There are 19 top rated UK equity income funds, that is those that are rated Gold, Silver or Bronze by Morningstar analysts.

Every single one of the funds holds GlaxoSmithKline – making up an average of 5% of each fund’s portfolio. The stock makes up 8% of Fidelity MoneyBuilder Dividend, Invesco Perpetual High Income and Invesco Perpetual Income.

Fifteen out of 19 of the funds invest in AstraZeneca, 14 of the 19 hold Royal Dutch Shell and 16 of them own Vodafone.

All but one of the top funds invests in BT, 14 out of 19 invest in British American Tobacco and 12 of them invest in BP.

These figures reveal that the majority of the top rated funds have almost a third of their portfolios in common – so much for diversification.

Of the 19 portfolios, 36% of the underlying holdings are large value stocks.

The three Gold rated funds - Invesco Perpetual Income, Invesco Perptual Higher Income and Artemis Income have seven out of 10 of their top holdings in common.

It is statistics like these which fans of passive investment use to argue the case against active management – as these overlapping stocks are also among the biggest in the FTSE 100 index.

In 2011, UK equity funds from Scottish Widows, Halifax, Prudential, Santander and Henderson were found to have at least 90% correlation between their top 10 holdings and the FTSE 100's biggest companies.

The top 10 largest companies in the FTSE 100 make up around 80% of the index, so by mirroring the blue chip index so closely fund managers were offering investors passive investment – but at the cost of active management.

Considering many tracker funds charge as little as 0.25% and active managers charge 1.5% a year, it pays to look under the hood.


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar