Guest blog: Ian Heslop, manager of the Old Mutual US Equity Income Fund
Traditional US equity income investing is mired in biases. An alternative approach is needed.
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 111.6% while an investor who reinvested the dividends would have achieved a total return of
162.5%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.
- 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