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.
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.
Both he and Mr Murphy supported the return of the short-lived Income and Growth sector, which was used between 2008 and 2010, in part because of funds missing yield requirements. The IA has not proposed to recreate the sector as part of its latest consultation.
Mr Henderson added: “What matters to investors is the amount of money they’re getting over time from their fund.
“I think people will disagree with that. They will say what matters is the headline yield today, because that’s what people will see and what they’ll get in the first year. My answer to that is: what are we actually looking for in the sector?”
The IA’s consultation options
Option 1 – No change.
Option 2 – Replace the current 110 per cent hurdle with a requirement to generate a yield higher than the FTSE All-Share index over three-year rolling periods. Retain the 90 per cent yield requirement over one year. Demonstrate that an above-market average income is an objective of the fund in product or client documents. Other sector criteria is unchanged.
Option 3 – Require specific disclosure in relation to income – for example, net yield, absolute net income generated over five years for a £100 investment, income growth, total returns and volatility. Accordingly, the yield hurdles in the current definition would be removed.
For Option 3, asset managers need to inform the IA of the method by which the disclosure will be made, and which should have regard to the efficacy of the monitoring.
In addition, any alternative sector inclusion criteria needs to be set out in detail and should:
l Seek to achieve a population of funds that provide best utility to sector users;
l Remain valid over the long term and across market cycles.
