Income stalwarts back sector review

Income stalwarts back sector review

High-profile UK equity income managers unencumbered by their sector’s dividend yield rules have backed their peers’ calls for change, a move which suggests the Investment Association’s (IA) consultation will prompt an overhaul of its requirements.

As revealed by Investment Adviser last week, the IA has announced a four-week discussion on whether to change the need for UK Equity Income funds to yield 10 per cent more than the FTSE All-Share index over a rolling three-year period.

Eighteen funds have now been removed from the sector for failing to meet the requirements. Firms such as Invesco Perpetual, Schroders, and Rathbones, whose funds are among those to have exited, have welcomed the IA’s review.

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Artemis and Aviva Investors, whose UK income funds are in no danger of being ejected, have also backed a change of heart by the trade body.

The IA has proposed either preserving the status quo, lowering yield requirements, or doing away with them altogether in favour of greater disclosure over income generation.

Alan Gadd, head of product and distribution development at Artemis, whose £6.6bn Income fund is the second-largest in the sector, said the firm would support the best outcome for “high-profile funds wanting to come back”.

He said: “The things that would be sensible to change point us towards option two. But this goes hand in hand with option three. With a spotlight on the sector, why would we not provide more information for what investors need?”

Chris Murphy, manager of the £920m Aviva Investors UK Equity Income fund, called the review “long overdue” and similarly backed options two and three.

“Our preference is for option two,” he said. “We would also support additional disclosure on the income aims of the fund.”

Others are still considering their options ahead of the May 13 deadline.

Fidelity, whose £1bn Moneybuilder Income and £430m Enhanced Income funds sit in the sector, said it had held preliminary discussions but was still weighing up the options.

Liontrust’s Stephen Bailey, co-manager of the £520m Macro Equity Income fund, took a more critical view, calling the consultation “unedifying”.

He said current market conditions, whereby a contingent of high-yielding mega caps have pushed up yields on the market as a whole, were not at fault for funds missing objectives.

“The IA needs to be clear in explaining how [a] new threshold will be arrived at and probably more honest in flagging the arbitrariness of any yield target.”

“If these investors wanted a growth bias, they would presumably have selected a fund from the IA’s UK All Companies sector.”

Firms responding to the consultation will also provide additional food for thought for the IA’s ongoing, separate review of its entire sector structure. The trade body launched the initiative last year to address the burgeoning Unclassified sector, but this has been pushed back further into 2016, with a complete sector classification overhaul still on the cards.

Henderson director of global equity income James Henderson, whose UK Equity Income & Growth fund was removed from the Income sector in 2014, backed the greater disclosure option and suggested the creation of a new sector.