Shell and BP less favoured among UK income funds

Shell and BP have fallen out of the top 10 holdings of many income-focused funds.

Over the past three months, Royal Dutch Shell and BP have fallen out of the top 10 holdings of many UK equity income funds, according to the latest data from Octopus Investments.

In March, Octopus Investments found that 65% of funds in the UK equity income sectors held Royal Dutch Shell in their top 10 holdings. That has since fallen to just 36%, based on data analysed in May. Meanwhile, between March and May the number of UK equity income funds with BP as a top 10 holding fell by 61% to 43%.

The fall from being a top 10 holding in so many funds has two potential causes.

First, Royal Dutch Shell cut its dividend for the first time since the Second World War, potentially reducing its income prospect of the stock in many fund manager’s eyes, prompting them to cut their holdings.

As Chris McVey, fund manager for the FP Octopus UK Multi Cap Income fund, notes: “As you would expect, income fund managers have had to adapt to the new environment, and many have rebalanced their portfolio in response.”

However, BP has yet to cut its dividend but has also fallen out of the top 10 holdings of many funds by roughly the same proportion as Shell. Fund managers may be selling their holdings on the anticipation that persistently low oil prices will eventually force BP to cut its payments.

However, another likely reason for both oil stocks falling from the top 10 holdings of equity funds is the huge decline of both of their share prices. Year-to-date Shell’s share price is down 40% and BP’s 35%. Both have failed to recover inline with the broader market, with the FTSE All Share now down roughly 18% year-to-date. As a result, the value of fund manager’s holdings compared to their other holdings has declined, reducing their overall weighting in the portfolio.

Data from Octopus investments also showed that Lloyds Banking Group, HSBC and Legal & General have also fallen out of the top 10 holdings of many income funds.

Financials were also forced to cut their dividends due to the coronavirus crisis. However, financials are also cyclical stocks, rising and falling with the outlook of the overall economy, meaning their share prices have suffered in recent months. Therefore, the cause of their fall from top 10 holdings is also likely a mixture of fund manager rebalancing and broader share price declines.