This concentration hit a lot of equity income funds in 2010 when BP, one of the biggest dividend payers, suddenly cut its dividend following the oil spill in the Gulf of Mexico.
This has led many other income managers to diversify overseas, and not just in developed markets.
James Burns, head of the multi-manager team at Smith & Williamson, says that emerging markets are starting to look more and more attractive for income as the payout ratios of companies in emerging markets improve.
This view is shared by Olivia Mayell, portfolio manager for the JPM Multi-Asset Income fund.
She explains: “With emerging market income, people have not considered the dividends but managers can find good companies paying a good income there, and that’s a relatively new story.”
But diversifying by region is not the only option open to equity income investors. Increasingly, managers are looking to diversify by market cap.
F&C multi-manager Rob Burdett says that investors need to look beyond the big, lumbering equity income giants for funds that are smaller and more nimble and can take advantage of the abundant income opportunities in the small and mid cap space.
Mr Burdett recommends the PFS Chelverton UK Equity Income, but equally good performers in this space include the CF Miton UK Multi Cap Income fund, run by Gervais Williams, and the Unicorn UK Income fund, run by John McClure.
These funds all pay out a yield often bigger than the larger equity income funds and, while they will likely be more volatile, offer good diversification for investors.
Fixed income: High-yield opportunities
Yet for those not able to stomach the volatility from equities, there are still opportunities in fixed income, just not what - or where - they once were.
Ms Mayell says that it is a struggle to find value because “you are not being paid for the risk and the yield is not good enough”, which is a view shared by managers when the yields on corporate bonds are dipping below four percent.
Ms Mayell is much more optimistic about the high yield story. She says: “The high yield assessment is more straightforward. You can get a meaningful yield, they have good fundamentals with a low default rate and it is a stable market, particularly in the US as it is better for liquidity.
She acknowledges that “yields have come in a bit and and spreads have tightened up” and that tightening, bringing yields on high yield down to record lows under 6 per cent, is worrying some managers.
