IMA recombines UK equity income sector

2 July 2010 0:00 am | Updated: 2 July 2010 3:21 pm | By Chris Salih

The move follows a review of the UK equity income and UK equity income and growth sectors in February 2010. The full changes took effect from July 1, 2010.

The 110 per cent FTSE yield hurdle of the FTSE all-share index will remain in place and will be expressed as an intention. Funds will not be able to infinitely defer from meeting this target and the IMA has introduced a test for this definition that will see funds in the sector being required to meet the intended 110 per cent yield over three year rolling periods, by taking an average of each of the fund’s yield figures for each three year rolling period.

The IMA has also introduced a “hard edged” annual test to make sure funds offer a base level of income every year to remain in the sector. The test has been set at a level of 90 per cent of the FTSE all-share yield. The yield tests will continue to be applied at each fund’s year-end.  The trade body will continue to collect yield figures at each funds mid and year end for monitoring purposes. It also promises to publish the annual yield achieved by each fund. The asset based test will apply on a continuing basis.

Firms with funds in the UK equity income and growth sector have been reclassified and track records will be retained.

The IMA launched the UK equity income and growth sector last year to accommodate those funds struggling to meet the yield requirement and big names like Neil Woodford and Robin Geffen were among those to move out of UK equity income.

At the time, Invesco said Woodford would not amend the investment horizons of his income and higher-income funds, which have always been between five and 10 years. The investment firm claimed the IMA decision forced managers to focus on short-term yield at the expense of the long-term balance between income generation and capital growth.

The UK equity income and growth sector has funds which invest at least 80 per cent of their assets in UK equities, aim to have a historic yield on the distributable income in excess of 90 per cent of the yield of the FTSE All Share index at the fund’s year-end and which aim to produce a combination of both income and growth. It was introduced amid concerns that some funds were chasing performance over yield.

The sector was not met with much support at launch, while research from Money Marketing earlier this year found only one fund in the sector was failing to meet the yield requirements for the IMA UK equity income sector at the time.

Hargreaves Lansdown head of research Mark Dampier says: “They were stupid to introduce it in the first place and it was on the back of group pressure, the majority of which have now cut their funds’ dividends while Neil Woodford, who was asked to move sector, has increased it. Once again Woodford has come out of this looking good, which is a stark contrast to the IMA.”

Invesco Perpetual head of distribution Ian Trevers says: “We welcome the recombination of the equity income sector on behalf of the many advisers and clients whose views we have represented to the IMA during the review process.

“It has long been clear to us that investors in equity income funds are looking for more than simply 110 per cent of the current market yield investors have consistently placed their faith in investment managers who have managed portfolios carefully to provide a growing level of income balanced with the opportunity for capital growth over the long term. This has been the hallmark of successful equity income investing for over 20 years.”

“Neil Woodford has long been one of the most successful investors in the UK equity income sector. Not only do the funds that he manages top their peer group for total return over 10 years but also they have delivered more income to clients over that period than 80 per cent of the funds in both sectors combined.”

IMA chief executive Richard Saunders says: “Our priority  throughout has been to ensure that income focused funds are clearly  identifiable to investors and their advisers.

“But in addition  we have had to consider the most appropriate way of monitoring for income, to  ensure that the definition remains fit for purpose for the foreseeable future.  It has therefore been decided to apply the 110 per cent yield test over three year  rolling periods rather than annually, and to publish information about the  yields achieved annually to aid investors to make comparisons between funds. In addition, funds will be required to pass an annual 90 per cent yield test.  This approach allows funds sufficient flexibility to adjust to  changing market conditions in each year but also ensures that funds deliver a  base level of income every year.”  

 

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