Does buying multiple funds help?
Another problem is that income funds tend to resemble each another. The 10 largest UK income funds all have a positive “correlation” to each other over five years, meaning that returns are likely to rise and fall together.
“It is easy for investors to think that because they own three, four or five funds they have got a spread of exposure,” said Ryan Hughes of AJ Bell.
“They may own Threadneedle, Artemis and Woodford’s income funds, which are three very good funds, but they have a lot of commonality in their holdings. Investors need to understand the different investment styles, look at the top 10 holdings to see where the concentration of risk lies and start thinking more globally.”
Data from Morningstar, the research firm, found that 15 of the 79 UK equity income funds it analysed received more than 50pc of their yield from their top 10 holdings.
In recent years the task of diversifying has been made easier as more income funds have launched that invest either across the globe or in medium-sized and smaller UK companies, moving away from the same old names in the FTSE 100.
Mr Hughes recommended the Newton Global Income fund, a “very solid holding to sit alongside more traditional UK income funds”, and Artemis Global Income, which he said invests very differently from the big UK income portfolios.
For investors who want to stay in the UK but spread their risk across more companies, the Montanaro UK Income fund specialises in small and medium-sized UK companies.
“It often means looking away from the familiar names, and it has done a fantastic job over the past 10, 15 and 20 years,” Mr Hughes said.