Is your income fund as safe as you think?

Traditional US equity income investing is mired in biases. Ian Heslop, manager of the Old Mutual US Equity Income Fund, believes an alternative approach is needed.

Is your income fund as safe as you think?

Investing in US equities has been a powerful long-term strategy, and income investing has much to recommend it. Investing ten years ago in the S&P 500, and withdrawing the dividends, would have achieved a price return of 97% while an investor who reinvested the dividends would have achieved a total return of 145%1. Yet many investors may be unaware of risks to which traditional US equity income funds can be exposed: significant stock concentration, and biases to sectors and styles.

The risk of stock concentration

The five largest US equity income funds by AUM have, on average, 29.0% of assets in their top ten stocks2.  Heavy weightings can expose a fund to reversals in a small number of stocks, potentially increasing volatility. We believe in a more balanced stock allocation, increasing diversification.

The risk of sector bias

The largest funds in the sector are often biased towards or away from certain sectors. For example, the top five funds have on average only 15% in information technology (the best performing US sector in 2017) compared to a 25% allocation by the MSCI USA Net return Index3.

The risk of style bias

The largest US equity income funds tend to be biased toward a value style4 that prefers shares whose prices are low related to book value or earnings. The value style has underperformed the growth style over the last decade.

An alternative approach

There is a need for an alternative approach that avoids concentration and bias. Our approach is to be diversified, sector agnostic and flexible in style. When investing for income, we look beyond the more traditional dividend-generating sectors and adopt an unconstrained, total return approach. We believe our process offers genuine diversification from concentrated, style-biased funds.

 Key takeaways

  • Traditional income funds can be heavily concentrated in their top stocks
  • Traditional income funds can be biased toward certain sectors and styles
  • An alternative approach to income aims to avoid such biases, offering diversification

A unique approach to US equity income investing

In this video Ian Heslop, manager of the Old Mutual US Equity Income Fund, discusses the potential risks of traditional income investing, and why he believes an alternative approach is needed.

Find out more about the Old Mutual US Equity Income Fund

View the fund factsheet

1Source: Bloomberg, as at 14 February 2018. 2Source: OMGI, Morningstar, as at 30 September 2017. 3 Source: OMGI, Morningstar, as at 30 October 2017. 4 Source: OMGI, Morningstar, as at 31 December 2017.

Please remember that past performance is not a guide to future performance.  Investment involves risks.  The value of investments and the income from them can go down as well as up and investors may not get back any of the amount originally invested.  Exchange rate changes may cause the value of overseas investments to rise or fall. 

This communication is issued by Old Mutual Global Investors (UK) Limited. Old Mutual Global Investors (UK) Limited is the appointed investment adviser for Old Mutual Investment Management Limited’s in-house funds. Old Mutual Global Investors is the trading name of Old Mutual Global Investors (UK) Limited and Old Mutual Investment Management Limited. Old Mutual Investment Management Limited, Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ.  Authorised and regulated by the Financial Conduct Authority. Old Mutual Global Investors (UK) Limited, Millennium Bridge House, 2 Lambeth Hill, London EC4P 4WR. Authorised and regulated by the Financial Conduct Authority. A member of the IA.

Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Old Mutual Global Investors as a result of using different assumptions and criteria. OMGI 01/18/0124

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