Royal London Asset Management’s Martin Cholwill has rejected all three of the consultation options proposed by the Investment Association (IA) as part of its potential reform of UK Equity Income sector rules.
With 20 funds having been kicked out of the sector for failing to meet dividend yield requirements over the past three years, the trade body has now closed a consultation on reforming its stipulations.
The IA had proposed either keeping its existing rules, lowering the demand for funds to yield 10 per cent above the FTSE All-Share index over three years, or moving away from yield requirements altogether in favour of clearer disclosure on how much income a fund produces.
But Mr Cholwill, whose £1.8bn UK Equity Income vehicle remains in the sector, said he had proposed a new option to the trade body.
The manager said products in the sector should only have to match FTSE All-Share yields, but do so every year rather than on a three-year basis. Currently, funds need to achieve 90 per cent of the index yield on a 12-month view.
Mr Cholwill said: “What we don’t want is to allow growth funds dressed up as income funds in the sector. If you have an income bias, I should hope you’re able to yield the same or more as the index over one year.”
But he agreed with disgruntled managers forced out of the sector who claim current requirements force them into high-yielding stocks that might be susceptible to dividend cuts.
Schroders, Rathbones, Invesco Pepertual and Evenlode have claimed a focus on dividend sustainability and growth is more important than yielding 10 per cent more than the index.
Société Générale figures show that just 26 per cent of stocks in the All-Share index yield more than the average as of the end of March, down from 31 per cent at the start of 2015.
Mr Cholwill said this was pushing managers into fewer stocks, and those more likely to cut dividends. He added his continued presence in the sector had only been assured by a series of special dividend payouts from some of his mid-cap stocks.
The manager, who has 45 per cent in mid caps, received special dividends from firms such as homeware business Dunelm, Hargreaves Lansdown, Spirax-Sarco Engineering and wholesaler Booker.
He said: “It’s the combination of strong cashflow and a strong balance that provides a special dividend.” But he admitted these payouts “could not be relied on”.
Meanwhile, Mr Cholwill more than doubled his fund’s position in Shell at the end of February, from 2 to 5 per cent, in a bid to eke out returns.
The manager said five-year forward oil prices were close to $60 a barrel, around the level Shell said it needed to continue sustainable dividend growth.
The Royal London UK Equity Income fund has delivered 26 per cent over three years, compared with its sector’s average return of 17 per cent, data from FE Analytics shows.