In focus
The concentration of the FTSE’s dividends in a handful of sectors
means income investors may be better off looking to the IA Global
Equity Income sector for a core fund, writes Anthony Luzio
Leaving home
U
K equity income
investors are regularly
reminded about
the importance of
diversifying their sources of earnings
and it is not difficult to see why. It
was just over a decade ago that the
financial crisis led to banks slashing
their dividends across the board,
while only a few years later the Gulf
of Mexico oil spill led BP to suspend
its payment to shareholders.
However, it is important to
remember that the FTSE All Share
derives approximately two-thirds of
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“When you buy the average
share in the average UK
company, you’re not buying
an exposure to the UK
economy. You’re buying
businesses that have a very,
very global orientation”
Yet according to Ryan Hughes,
head of active portfolios at AJ Bell,
it would be foolish for UK investors
to rely solely on FTSE names for
income. However, this is not because
of a lack of diversification at the
regional level, but at the sector level.
“The UK market has got a very well
established and developed dividend
culture, but it has also got very
skewed areas where it derives the
income from,” he says.
“The largest stocks in the FTSE
generate most of the income and you
end up with portfolios that probably
have quite a lot in oil & gas and quite
a lot in financials. You don’t get that
diversity.”
Data put together by asset manager
Liontrust highlights the extent of this
problem, showing the oil & gas sector
its earnings from overseas, which
helps to explain why it is expected to
yield 4.4 per cent this year – close to
a historic high – despite the fact that
the UK economy remains sluggish.
In the words of FE fundinfo Alpha
Manager Nick Train: “The real
question to ask about the UK stock
market is, is it right to be optimistic
about the world? Because when you
buy the average share in the average
UK company, you’re not buying an
exposure to the UK economy. You’re
buying businesses that have a very,
very global orientation.”
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