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Beware dividend concentration in UK large caps – Seneca Investment Managers

Beware dividend concentration in UK large caps – Seneca Investment Managers

Comment from Peter Elston, CIO, Seneca Investment Managers

  • Venture into the mid cap space and find many decent yielding stocks
  • No need to sacrifice dividend cover or quality
  • UK equity income sector is not the only choice, multi-asset makes sense

“Dividend concentration among UK large caps is a growing concern, and there could be extreme concentration risk for investors in UK large cap income funds.

“However, venture into the mid cap space, and you can find plenty of decent yielding stocks. This is the focus for the UK equity segment of our multi-asset funds, principally because over time mid caps tend to perform better than large caps, both in terms of returns and volatility-adjusted returns (since 1998, the FTSE 250 index has beaten the FTSE 100 index by 5 percentage points per annum). But this is not the only reason. Mid caps are also under-researched, so stock picking opportunities abound.

“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’re 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 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 VT 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 are, we think, obvious.”



Past performance should not be seen as an indication of future performance. The value of investments and any income may fluctuate and investors may not get back the full amount invested.

The views expressed are those of the fund manager 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.

This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

Seneca Investment Managers Limited (0151 906 2450) is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at 10th Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. [FP17 199]

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