Schroders’ Global Equity Income fund has become the second of the fund house’s products to be removed from an Investment Association (IA) equity income sector for failing to meet yield requirements.
Schroders confirmed that the £120m fund has moved from the IA Global Equity Income sector into the IA Global sector this month, having failing to produce a yield 10 per cent higher than that of the wider market.
The move comes nine months after Schroders’ £1.1bn Income fund was removed from the UK Equity Income sector for similar reasons, and will put further pressure on relations between the fund group and the IA.
Schroders had considered quitting the trade body at the end of last year due to dissatisfaction with the IA’s agenda. It subsequently renewed its membership for an interim period of six months, the IA having replaced chief executive Daniel Godfrey and delayed implementing its divisive ‘statement of principles’ in a bid to quell member unrest.
While not the focal point of that discontent, equity income sector rules have become an increasing point of concern for asset managers struggling to produce sustainable dividends at a time when many yields look artificially high.
At the time Schroders’ managing director Robin Stoakley called the IA’s approach to equity income funds “outdated” and urged the trade body to overhaul the way it classifies funds.
The fund house said existing requirements forced managers to invest in a relatively small pool of high-yielding stocks, and suggested funds should only be required to calculate median yields.
The IA responded that Schroders’ ideas had “merit” and said it would continue dialogue with members.
Criticism has increased since that point. Société Générale analyst Andrew Lapthorne said last month that existing rules “could force funds to chase ‘bad’ dividends”, in particular in the domestic market.
“[In the UK] there is an acute shortage of above-market yielding stocks and the only way to capture this yield is by buying some very large cap stocks with very risky dividends,” Mr Lapthorne said in a research note.
A spokesperson from Schroders said of the latest ejection: “We run the Schroder Global Equity Income fund in accordance with our complete income strategy. This aims to deliver returns from two sources: firstly through the income the companies generate, and secondly, through the capital returns generated by the improvement of lowly-valued underappreciated companies.
“We believe that targeting an arbitrary fund yield, irrespective of the prevailing investment environment, is not the in the best interests of our clients. Following the sector reclassification of the Schroder Global Equity Income fund by the IA, there will be no change to the way in which we manage the fund.”