Out of 1,852 respondents, 36 per cent said they hold four or more UK Equity Income funds while a further 14 per cent hold three. According to Philippa Gee of Philippa Gee Wealth Management, three is an acceptable number, but four is probably too many.
"I think three is reasonable, as you can get a good blend of different approaches: a UK Equity Income tracker, a more cautious fund and an aggressive fund, and that’s a nice balance."
"With more than three you start to dilute the impact of that and I would question if you need that many."
Gee points out that many of the largest UK Equity Income funds invest in similar sectors of the market, meaning there is little point in holding more than one of them.
"You do not want to diversify and not actually achieve that goal," she said. "Just holding two different funds doesn’t give you the diversification."
FE Trustnet research has previously shown how the biggest funds in the sector move closely in line with the FTSE All Share, while a high proportion of the funds hold the same stocks in their top-10.
Gee says investors should look to diversify their holdings rather than duplicate the same performance and pay the fees associated with two similar funds.
The Vanguard FTSE UK Equity Income Index tracker has substantially outperformed the average fund in the IMA UK Equity Income sector over three years, according to data from FE Analytics.
It has made 43.5 per cent on a total return basis compared with the 33.6 per cent of the IMA UK Equity Income sector. It currently yields 4.65 per cent.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The low total expense ratio (TER) of 0.25 per cent will be a strong selling-point for cost-conscious investors.
While the majority of equity income funds tend to focus on the large dividend-paying companies such as utilities and tobacco firms, the funds with the highest total return invest in smaller and mid cap companies.
Unicorn UK Income has made 80.78 per cent over three years and 109.65 per cent over five – in both cases more than any other fund in the sector.
John McClure’s £83.9m fund is a concentrated portfolio of 39 mid and small cap stocks. It is currently yielding 3.39 per cent, according to FE Analytics. Its TER is 1.59 per cent.
The second-best performer over the past three years is Chelverton UK Equity Income, which is currently yielding 5.05 per cent, according to data from FE Analytics.
Performance of funds vs sector over 3yrs
Source: FE Analytics
The Chelverton fund invests in AIM stocks as well as the small cap companies on the main exchange and is currently worth £45.6m. The TER is 1.25 per cent, below the sector average, and notably low for a fund investing in smaller companies.
Among the defensively minded funds, star manager Neil Woodford’s Invesco Perpetual Income and Invesco Perpetual High Income funds are the most popular, with over £20bn in AUM between them.
Invesco Perpetual Income is yielding 3.66 per cent and has a TER of 1.68 per cent, according to our data, while the High Income fund is yielding 3.61 per cent and costs 1.69 per cent.
Gee says that the popularity of equity income as an asset class has some way to run.
"The dividend story has got more to play out and having that plus the potential for some growth means it’s still an attractive area to invest in," she said.
All funds mentioned in this piece have five FE Crowns.