There is a problem with the UK’s core crop of income funds. UK equity income trusts are highly concentrated in a few big names, which we think is a potential cause for concern for income-seeking investors. It is also a good reason to diversify one’s sources of income. This concentration is particularly worrying when you consider that many of the largest yielders in the index have an uncertain future, and there are question marks over the sustainability of their dividends. Just eight companies make up over the 50% of the yield of the FTSE 100, according to Bloomberg figures, and the likes of Shell, BP and GlaxoSmithKline feature 17, 14 and ten times in the top five holdings across the 24 trusts in the UK Equity Income sector. As we discussed in our recent article, Rebel Rebel, the AIC has overhauled its sectors, aiming to make it easier for investors to identify and compare appropriate investments. However, we believe they have overlooked a potentially interesting group of trusts that could more properly be considered a sector and which might help mitigate this problem: small cap equity income. As we highlighted in Rebel, Rebel, trusts that don’t easily fit within sector definitions frequently trade on wider discounts than might otherwise be the case. We think this may be the situation with the trusts in our new sector, which offer an interesting way of diversifying an investor’s sources of income and resolving the problem of concentration in the AIC UK Equity Income sector. Although yielding less than the large cap income vehicles on average, there are some trusts with innovative structures and policies offering significant yields, and there are good dividend growth prospects from some of them too. There are other benefits to small cap equity income trusts, including the potential for capital appreciation. Here, we discuss the overlooked opportunity in small cap equity income and the benefits for income-hungry investors.
01 Aug 2019