Home / Peter Elston’s Investment Letter – Issue 25: June 2017

Peter Elston’s Investment Letter – Issue 25: June 2017

Beware dividend concentration among UK large caps

Much has been written about dividend concentration among UK large caps of late. According to a recent article(1) in Investment Week, more than half of the 79 funds in the Investment Association’s UK Equity Income sector derived over 40% of their income from their largest ten holdings. Furthermore, according to an article in Money Observer(2), half of FTSE 100 dividends this year will come from just seven companies. These figures reflect extreme concentration risk and should be a concern for investors in UK large cap income funds.

That said, although dividend concentration may have increased somewhat in recent years, it is not particularly out of line with history. According to our analysis, dividend concentration was lower in 2016 than in 2006, 2007 and 2010. This can be seen in the chart below.

Chart 1: % Decrease in yield when top 10 dividend payers taken out of top 100




But fear not, help is close at hand. Venture into the mid cap space, and you can find plenty of decent yielding stocks. According to an April article in Investors Chronicle(3), “Analysis of the FTSE 350 reveals 117 companies with a trailing yield over 3.5 per cent, and even if we tighten up our selection criteria to those with strong cover of at least two times and PE below 13, we are left with 35 companies that pay a healthy dividend.”

In the UK equity segment of our multi-asset funds, we have a focus on mid caps. This is principally because over time mid caps tend to perform better than large caps, both in terms of returns as well as volatility-adjusted returns (since 1998, the FTSE 250 index has beaten the FTSE 100 index by 5%pts per annum).

But this is not the only reason. Mid caps are under-researched, so stock picking opportunities abound. Furthermore, as mentioned, you can find decent yields in the mid cap sector.

Our UK stocks, most of which are mid caps, on average yield 4.3% compared with 3.0% for mid caps in general. You may think we are sacrificing dividend cover but this is not the case. Average coverage for our stocks on a forward looking basis is 1.9 times compared with 2.1 times for the mid cap universe (and with 1.6 times for large caps!) Nor are we sacrificing quality: our return on equity is 21.4% on average compared with 13.8%.

According to Trustnet, the median fund yield in the IA UK Equity Income sector at the end of May was 3.9%. Furthermore, the median FE Risk Score for the sector was 85 (this means that on average, the volatility of funds in the sector was equivalent to 85% that of the FTSE 100 index). Finally, the median two-year fund performance was 13.8%.

A search for income does not need to be confined to the UK Equity Income sector though. Comparing these numbers with those of our LF Seneca Diversified Income Fund reveals some interesting results. Our fund yields 4.7% versus the median income yield of 3.9% for the IA UK equity income sector. Ah, but that’s because it is sacrificing total return, I hear you say. Not true. Two year total return has been 16.6% versus 13.8%. In that case it must be because the fund is more volatile. Again, no. The fund’s FE Risk Score is 43 half that of the UK Equity Income sector average!

The merits of a multi-asset approach in general and of our fund in particular are, we think, obvious.


(1) https://www.investmentweek.co.uk/investment-week/analysis/3007907/how-concerned-should-investors-be-about-dividend-concentration-risk

(2) http://www.moneyobserver.com/our-analysis/half-ftse-100-dividends-to-come-just-seven-companies-2017

(3) http://www.investorschronicle.co.uk/2011/09/09/the-best-dividend-payers-OC7nBGwijAvjAVCwzyQNbL/article.html


Current fund targets

The target weights in the table below are where funds should be positioned currently. Actual positions may deviate slightly from these target weights as a result of market movements or ongoing trades for example.

Table 1: Current fund tactical asset allocation (TAA) target weights  as of 31 May 2017 (prior issued letter’s targets in brackets)



  • Specialist Assets was increased by 1.2%pts to accommodate new holding (see below). This increase came out of cash.
  • Sterling fell as opinion polls showed the gap between Conservatives and Labour narrowing
  • It was broadly a good month for equities, though in the UK mid caps lagged large caps, reversing April’s gains
  • Employment and inflation data across the world in general continued to improve
  • Very good results from Intermediate Capital, which included a 17% increase in the total ordinary dividend.
  • Increased prospect of a special dividend from Victrex, following very strong cash generation in the first half of the company’s financial year.
  • A review of the CouplandCardiff Japan Income & Growth Trust during the month highlighted the attractions of the portfolio, with its bias towards smaller companies and focus on dividend growth.
  • European Assets Trust performed well, driven by its large exposure to the industrial sector.
  • We invested in PRS REIT which launched with a successful IPO. The REIT will build a portfolio of newly built private rental properties and benefit from significant economies of scale.
  • We participated in the additional equity raise of International Public Partnerships, the listed infrastructure vehicle. The team have a proven track record, high quality operational assets and inflation protected income.


  • Small additional investment in Muzinich Short Duration High Yield Bond Fund


  • Additions were made to the Cullen North American High Dividend Value Equity Fund, Invesco Perpetual European Equity Income Fund and Magna Emerging Markets Dividend Fund.
  • European Assets Trust was reduced, in order to bring position to target weight.
  • Small increase in Royal London Short Duration Global High Yield Bond Fund
  • We added to the holding of RM Secured Direct Lending as the team has constructed a good quality secured loan portfolio with solid asset backing.

Download this investment letter as a PDF


Important Information

Past performance is not a guide to future returns. The value of investments and any income may fluctuate and investors may not get back the full amount invested. This document is provided for the purpose of information only and if you are unsure of the suitability of these investments you should take independent advice.
The views expressed are those of Peter Elston at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca and do not constitute investment advice. Whilst Seneca has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.
LF Seneca Funds
These funds may experience high volatility due to the composition of the portfolio or the portfolio management techniques used. Before investing you must read the key investor information document (KIID) as it contains important information regarding the funds, including charges, tax and fund specific risk warnings and will form the basis of any investment. The prospectus, KIID and application forms are available from Link Fund Solutions, the Authorised Corporate Director of the funds (0345 608 1497).
Seneca Global Income & Growth Trust plc
Before investing you should read the latest Annual Report for details of the principle risks and information on the trust fees and expenses. Net Asset Value (NAV) performance may not be linked to share price performance, and shareholders could realise returns that are lower or higher in performance. The annual investment management charge and other charges are deducted from income and capital.
Seneca Investment Managers Limited is the Investment Manager of the Funds (0151 906 2450) and is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP17/188