Equity IncomeOct 20 2016

IA considers splitting UK Equity Income sector in two

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IA considers splitting UK Equity Income sector in two

The Investment Association (IA) has proposed the creation of two separate UK equity income sectors as a potential solution to its ongoing consultation on how best to categorise funds in the space, Investment Adviser understands.

The trade body has been running a consultation on the future of the UK Equity Income sector for the past six months after more than 20 funds were ejected from the space for failing to meet yield requirements. It originally proposed three ways to overhaul the sector, none of which involved the creation of a new grouping.

But a source close to the process said the trade body has now begun speaking to members about the possibility of launching an additional sector. This would house funds that aim to produce income but fail to meet the UK Equity Income sector's requirement that funds yield 10 per cent more than the FTSE All-Share over rolling three-year periods.

The existing sector could then be renamed 'UK Higher Income' or similar in order to distinguish it from the new grouping.

The head of distribution at a major fund firm said the option had initially been mooted at meetings held at the beginning of the consultation period, but was later dropped as the trade body focused on finding a single all-encompassing solution.

However, the IA has now begun taking the suggestion more seriously in the absence of any strong consensus.

Opting for this solution would rely on the 21 funds ejected from the UK Equity Income sector desiring a return to an income-focused bracket. The majority of this cohort now sit in the UK All Companies sector.

Investment Adviser understands the trade body began speaking to the managers of these funds last week. It will continue discussing the idea over the next fortnight with a view of making a final decision by the end of 2016. At least some of these managers are believed to have reservations over the new proposal, however.

The IA first began consulting in April on whether to overhaul its UK Equity Income sector rules after a spate of high-profile funds were forced out - amid complaints the yield requirement obliged managers to buy higher-risk stocks.

The IA's initial three options were to retain the current rules, replace the 10 per cent hurdle with a basic requirement to yield more than the All-Share over three years, or to remove yield requirements all together in favour of greater disclosure of how funds generate income.

But no consensus emerged among fund firms, and the trade body subsequently decided to extend questioning to advisers and consumers, pushing back the decision deadline to the end of 2016.

An IA spokesperson said: “The UKEI sector review has been a very open process drawing upon the views of our membership, consumers and their advisers. We are still discussing the options and we will announce the results of the consultation in due course.”