The Montanaro UK Income fund is the latest to be removed from the Investment Association’s (IA) UK Equity Income sector for failing to meet yield requirements.
The £127m fund - the sector’s top performer last year - did not meet the IA’s requirement to produce a yield equivalent to 90 per cent of that of the FTSE All-Share each year.
Under the IA’s yield calculations, based on the year-end NAV of the fund, the Montanaro fund yielded 3.2 per cent, 0.1 percentage point below the required threshold.
The fund becomes the twentieth to be removed from the sector for missing yield requirements, though most of this group have failed to meet three-year, rather than one-year, yield demands.
Investment Adviser revealed last month the trade body is currently consulting on an overhaul of its rules for the sector.
Tom Norman-Butler, Montanaro’s head of business development, added his voice to those who have criticised the IA’s requirements, claiming they forces managers to buy lower quality, risky investments.
“We will not sacrifice quality for the sake of reaching an arbitrary yield target just to ensure sector inclusion. We believe that the IA should instead consider the absolute level of income generated by a fund and the growth of this income over time. An optically high yield does not necessarily provide a good income; or indeed any income at all.”
Mr Norman-Butler also noted that a calculation based on the fund’s starting NAV would mean a yield of 3.7 per cent, equivalent to that of the All-Share.
The fund will move to the UK All Companies sector in the coming weeks and end the use of the UK Equity Income sector as its benchmark.
