Which Stocks are UK Equity Income Fund Managers Buying?

Morningstar data reveals that healthcare stocks were most popular among the top rated UK equity income fund managers

Karen Kwok 11 August, 2016 | 4:26PM
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Top rated UK equity income fund managers are snapping up healthcare stocks, according to data compiled by Morningstar.

Healthcare companies AstraZeneca (AZN) and GlaxoSmithKline (GSK) and tobacco firm Imperial Brands (IMB) were among the most popular stocks invested in by the 13 highest rated UK equity income fund managers as identified by Morningstar analysts.

Using the Morningstar Portfolio X-ray tool, we found that many stock holdings overlapped among funds under the UK equity income sector.

Those funds are three Silver Rated funds Threadneedle UK Equities and Royal London UK Equity Income, JOHCM UK Equity Income, and 10 Bronze Rated funds Artemis Income, BlackRock UK Income, CF Woodford Equity Income, Fidelity MoneyBuilder Dividend, Franklin UK Equity Income, Jupiter Income Trust, Liontrust Macro Equity Income, Old Mutual UK Equity Income, Schroder UK Alpha Income and Standard Life Investments UK Equity High Income.

The US Election Impact on Healthcare Stocks

AstraZeneca is the only company whose shares are held by all 13 top rated UK equity income fund managers.

CF Woodford Equity Income holds the biggest allocation compared to its peers at 7%, although the fund recently has sold shares in pharmaceutical companies to capitalise on the post-Brexit opportunities.

Threadneedle UK Equity Income also has 6.8% of the fund in AstraZeneca’s shares while Fidelity MoneyBuilder Dividend and Jupiter Income Trust both hold 5% allocations.

Healthcare stocks were hit badly over the last year because of concerns over the potential policies implementation designed to reduce the profitability of healthcare companies, said Evan Bauman, manager of the Legg Mason Clearbridge US Aggressive Growth fund. However with the US election coming forward, the future of the healthcare sector is set to take a turn.

“I would not be surprised if a resolution to the election ends up being a huge catalyst for the healthcare stocks, regardless of the outcome,” Bauman said, “There is now tremendous value in the healthcare sector, and we have accessed very attractive valuations, especially given the tremendous growth prospects.”

Damien Conover, director of healthcare equity research at Morningstar said AstraZeneca creates growth opportunities by aggressively pursuing acquisitions and it significantly cut costs to mitigate lost profits from products losing patent protection.

“New management of the company is quickly focusing the pipeline toward unmet medical need, which should increase the odds of success and pricing power for the new drugs,” Conover noted.

Another healthcare stock GlaxoSmithKline is also included in 12 of the UK equity income fund managers’ portfolio. Threadneedle UK Equity Income has 6.8% of its shares and CF Woodford Equity Income has 6.3% of its holdings in its portfolio.

Tobacco Companies Also Proved Popular

Tobacco company Imperial Brands is held by 11 of the top rated UK equity income funds. CF Woodford Equity Income has 7.7% in the shares while Threadneedle UK Equity Income has a 6.9% allocation. Fidelity MoneyBuilder Dividend also has a 6.2% allocation.

Imperial Brands appears to be gaining share in the US without aggressive pricing actions, Philip Gorham, Morningstar equity analyst said.

“With a barbell product portfolio concentrated at high and low price points and across the total tobacco space, Imperial Brands is well positioned to exploit the emerging trends of trading up in developing regions and trading down in some of its more mature markets,” Gorham said.

Another tobacco giant British American Tobacco (BATS) was also in eight of the top UK equity income funds’ portfolios. While CF Woodford equity Income holds 6% of its shares, Schroder UK Alpha Income and BlackRock UK Income both have 5.9% of its holdings.

Gorham added that British American has an impressive brand portfolio that is fairly evenly balanced across price points.

Energy and Telecoms... and Financial Stocks

While oil prices still face volatility, energy companies Royal Dutch Shell PLC (RDSB) and BP (BP.) were still among the top stocks UK equity income funds own. Telecoms companies BT (BT.A) and Vodafone (VOD) were also popular.

Financial stocks are occupying less holdings among UK equity income funds as well, with only international bank HSBC (HSBA) and insurer Aviva (AV.) taking the last few spaces on the top 10 holdings list.

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

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk