Split decision
Share
Chris Salih reports the re-merging of UK equity income has been welcomed, with many saying the sector should never have been divided in the first place
Advisers and fund managers have broadly welcomed the Investment Management Association’s decision to recombine the UK equity income sectors.
The move comes after a review of the sectors in February with the changes implemented on July 1.
All funds in both sectors retain their track record but a number of rules have been put in place, including the introduction of 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 90 per cent of the FTSE All-share yield.
The 110 per cent FTSE yield hurdle of the All-share index stays and will be expressed as an intention. Funds will not be able to defer infinitely from meeting this target and the IMA has introduced a test for this definition that will see funds in the sector 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 timeframe.
The IMA launched UK equity income and growth last year to accommodate those funds struggling to meet the yield requirement. Big names such as Invesco Perpetual’s Neil Woodford and Neptune’s Robin Geffen were among those to move out of the sector.
Invesco Perpetual head of distribution Ian Trevers says: “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 run 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 more than 20 years.”
Hargreaves Lansdown senior analyst Meera Patel says: “The sector should not have been split in the first place. The move was down to a number of fund groups being unhappy that the focus of some funds has moved with yields suffering.
“That said, some of the funds in the UK equity income and growth sector now offer greater yields than those in UK equity income. The split was just made at a bad time.”
Troy Asset Management director Francis Brooke agrees that the IMA has done the right thing in combining the two sectors, but warns that funds may not have met the UK equity income criteria if they decided not to invest in risky high-yielding stocks at the end of 2008, which at the time resulted in many funds getting kicked out of the sector.
“The IMA has a committee that should look at all the All-share yield and see whether it is sensible to expect investors to sustain yields higher than the All-share. There should be some common-sense test applied to the All-share yield.”
Schroders head of UK intermediary business Robin Stoakley believes the IMA should have kept the sectors separate, having only made the decision to split them last year.
’It has long been clear to us that investors in equity income funds are looking for more than simply 110 per centof the current market yield’
He says: “We were fairly relaxed on it as a firm either way. The more sectors there are within the IMA, the better it is for IFAs as it allows a better comparison of funds that are in the same sector but are perhaps doing different things.
“That said, there was lots of talk that a number of funds in the IMA UK equity income and growth sector were looking to move back into UK equity income.”
Aberdeen co-head of multi-manager Aidan Kearney says Aberdeen was looking to bring its fund back to the UK equity income sector, having been moved across last year.
Kearney says there were obvious reasons for missing the 110 per cent All-share yield target in 2009 but feels the IMA should stick by that figure now.
He says: “I am not sure about the validity of having a base level of income to stay in the sector being set at 90 per cent of the FTSE All-share. It should remain at 110 per cent and if funds cannot make that target they should move across to the likes of the UK All-companies sector.”
Bestinvest senior investment adviser Adrian Lowcock is in favour of the 90 per cent minimum yield on the All-share.
He says: “The IMA has reversed a decision that should not have been made in the first place. What this does now is offer flexibility to fund managers for events such as BP as it means they do not have to be forced to sell a stock because it may not offer a great yield. The IMA may now have got the balance right on a sector that is very important to the IFA market.”
If you enjoyed this article, sign up here to receive daily email updates from Money Marketing and Follow @_moneymarketing
