Several high-profile equity income managers have adopted unusual methods to protect their performance after the problems at BP.
It emerged last week that the energy giant is considering halving its next proposed dividend payment after cancelling the previous three pay-outs.
A cut in BP’s proposed dividend would aggravate the problems of British equity income funds, many of which rely heavily on BP’s dividend payments. (article continues below)
To continue providing a steady stream of income for their investors, fund managers have used derivatives, shifted parts of their portfolios overseas and allocated to small and mid caps.
Tineke Frikkee, the manager of the Newton Higher Income fund, has increased her use of special dividends and covered call strategies to boost income.
James Lowen and Clive Beagles, the managers of the JOHCM UK Equity Income fund, have protected performance by investing across the whole of the British stockmarket instead of focusing only on FTSE 100 companies.
Adrian Frost and Adrian Gosden, the managers of the Artemis Income fund, have upped their overseas exposure to 15%. Frost says buying other utilities and telecoms might have reduced returns and increased concentration risk, which is why he chose to diversify for the yield by investing in overseas stocks.
“BP used to be 7% of our total yield for our investors,” Frost says. “This was too high.”
Richard Troue, an investment analyst at Hargreaves Lansdown, says many retail investors were unaware of how much of their investment was held in a single company at the time the BP spill occurred.
“The BP crisis has made people more aware of the risk,” he says.
Some of the measures adopted by fund managers, such as increased use of special dividends and covered call strategies, limit the potential for capital growth.
Simon Nichols, Frikkee’s alternate manager, says the Newton team felt it was important to provide a steady source of income, even if it meant sacrificing some long-term growth.
BP declined to comment.