Neptune’s Geffen takes aim at Woodford and fellow income managers

Neptune’s Robin Geffen has lambasted UK equity income managers who rely on dividends from a handful of companies and warns half the funds in the IA UK Equity Income sector will be “kicked out” as yield generation plummets following changes to sector rules.

In April the Investment Association lowered the yield requirements for funds in the UK Equity Income sector from 110 per cent to 100 per cent following the exclusion of 22 funds from the sector. However Geffen maintained he would continue to target a yield of 110 per cent, branding the decision “gobbledygook”.

Since the rule change, the number of funds yielding more than 110 per cent has fallen dramatically, research by Neptune shows. Last year 85 per cent of funds in the UK Equity Income sector yielded more than 110 per cent, with the number dropping to 30 per cent this year, while the percentage of assets in funds yielding more than 110 per cent has fallen from 55 per cent in 2016 to less than 20 per cent in 2017.

“The rule change has had a massive effect on the income funds people own,” Geffen says. “In 2016 all of the funds in the sector yielded 100 per cent of the FTSE All Share. In 2017 only half of the funds out there yield more than the market. There has been a massive behavioral change, and nobody is talking about it. Half of the funds will be kicked out of the sector.”

Geffen, who is chief executive and runs the £200m Neptune Income fund, says dividend risk – the concentration of dividends from a small number of stocks – is “greater than ever” with less than 30 per cent of UK companies currently yielding more than the FTSE All Share.

“The Neptune Income fund is absolutely not a barbell strategy, every stock has a proper yield,” Geffen says. “What managers are doing is truly shocking. I’m really worried about the way fund managers focus their bets when half the income is from the top 10. It is shocking and incredibly risky. Dividend risk is here to stay and fund managers should reveal it.”

In March Neptune announced it was introducing a dividend risk breakdown to its fact sheets to increase transparency for income-seeking investors.

Geffen says that over reliance on widely-held income stocks such as Woodford favourites Provident Financial and AstraZeneca – which have both recently plummeted in value – pose a high risk to investors.

“I warned about AstraZeneca a few months ago; I said it looked like Tesco, and Tesco was a disastrous income fund holding. Then it issued its first profit warning. Way over half of the equity income funds have AstraZeneca and in a lot of cases it’s in their top 10 holdings.

“Provident Financial – this is what happens if you have two profit warnings. A number of managers, some of them quite well known, have this in their top 10. This is the heavy lift and load stock, 4 or 5 per cent of a fund. It fell 70 per cent in a day. It had one profit warning and no-one really listened, it had its second and it’s a catastrophe. Think what might happen if AstraZeneca issues a second profit warning. They will cut their dividend next time. This is bad, bad news. Funds would get hit on their capital and yield. It is a bad market for complacency.”

The Neptune Income fund’s top 10 holdings account for 19 per cent of its yield, compared to 43 per cent in the average UK equity income fund, Geffen says.

Furthermore, 22 per cent of UK equity income funds rely on one fund to provide 10 per cent or more of the yield, while 43 per cent of the funds in the sector rely on BP and Shell to deliver upwards of 10 per cent of the yield and 26 per cent of the funds are dependent on the top 10 holdings to deliver 50 per cent or more of the yield.

“There is a reliance on BP and Shell, but investors are certainly not getting a 10 per cent yield from them,” Geffen says.

He warns investors may be unaware of the crossover between the various income strategies they hold.

“Investors approaching retirement typically have between two and four income funds,” Geffen says. “Some funds have 70 to 80 per cent stock overlap with each other. The Neptune Income fund has a 7 per cent stock overlap with the Woodford Equity Income fund.”

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