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EFin: BP dividend woes will force fund managers to look overseas

William Hutchings
11 Jun 2010

Any decision by oil giant BP to suspend its next dividend payment could spur a backlash among retail investors and hasten the end of an era for UK equity income funds as they refocus to invest globally

BP is a favourite investment of many UK equity income funds, which aim to generate a regular income by investing in companies that pay high dividends.

In a typical year, BP accounts for more than 13% of dividend payouts of the FTSE 100 list of largest UK quoted companies. If the company pays no dividend this year, investors in income funds – many of whom are pensioners who rely on the funds as a steady source of earnings - could find their income cut by a seventh. As a result, they are expected to look more favourably at global equity income funds.

Dick Saunders, chief executive of the Investment Management Association, a trade body for UK asset managers, said: “A decision by BP to avoid paying a dividend would encourage the already-growing interest in international or global income products. Diversifying outside the UK reduces the exposure to the impact of a single event.”

Charles Richardson, chief executive of UK fund manager Veritas Asset Manager, which runs a global equity income fund, said: “BP will provide an important catalyst to raise the issue in people’s minds. It reinforces the argument that investing in global equities offers a broader opportunity set and diversification: if you want to invest in the best companies, don’t restrict yourself, go global.”

Sticking to funds that invest only in UK equities has the advantage of holding shares in companies that retail investors recognise, and protects them from the risk of foreign exchange losses, so fund managers and investment consultants expect UK equity income funds to remain popular for some time. However, the trend favours global or international equity funds.

Ian Chimes, managing director of PSigma Asset Management, a UK fund manager that runs UK equity income funds, said: “BP will be an issue, there would be a lot of disappointment and it will make people more willing to look overseas. UK funds remain attractive relative to cash, however.”

Ben Yearsley, a funds analyst at Hargreaves Lansdown, a UK firm that recommends funds to retail investors, said: “Most UK equity income funds have 4% or 5% in BP. If the company doesn’t pay a dividend, it might make a few more people think about turning to global equity income funds.

“I expect most people will continue to hold UK assets as the main part of their portfolio, but investors have been looking increasingly at overseas equity income funds for the last two years.”

Invesco Perpetual, whose star manager Neil Woodford runs £16bn in UK equity income funds, more than any other manager, launched a global equity fund 18 months ago. It said at the time that it had identified a gap in the UK market for these funds. Paul Boyne, who manages the fund, said: “BP will encourage investors to look at global equity income.”

Consultants said most UK asset management companies have been investing in overseas equities, and said UK managers would be able to cope well with any shift of investors from UK equities to global equities. The IMA's Dick Saunders said: "I don't think it will be detrimental to London at all. We are probably better-placed than anywhere else when it comes to managing global equity portfolios. We can hold our own against anybody."

http://www.efinancialnews.com/story/2010-06-11/equity-income-fund-managers-will-shift-to-global-equities