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Adviser Fund Index

The Investment Management Association’s clampdown on the UK equity income sector has affected some of the biggest names in the industry.

Stricter enforcement of yield targets led to 17 funds joining the newly created UK equity income & growth sector in January. Notable entrants included Neil Woodford’s £7.9bn Invesco high income and £5.7bn income portfolios.

Tighter monitoring of UK equity income fund yields comes in response to criticism from some groups that the IMA has not been tough enough in applying its sector rules. UK equity income requires funds to generate a historic yield in excess of 110 per cent of the FTSE All-Share – the index yielded 4.49 per cent last year, giving a target UK equity income yield of 4.94 per cent.

According to – a website launched by Liontrust, New Star and Newton in 2008 – Woodford’s funds top the five and 10-year total return tables but also feature in the list of 10 lowest-yielding equity income portfolios. Income and high income produced yields of 4.31 per cent and 4.16 per cent respectively in 2008 compared with 10.7 per cent from New Star UK strategic income.

Because of the yield disparities, the IMA created UK equ-ity income & growth in January. The sector is designed to accommodate funds which generate a yield in excess of 90 per cent of the yield of the FTSE All-Share and “produce a combination of both income and growth.” The IMA expects to review the equity income sectors again next January, “or at such time as is appropriate to market circumstances”.

However, some advisers question whether creating a separate sector for lower-yielding funds was worthwhile.

In a statement, Hargreaves Lansdown criticised the decision on two fronts. First, it says, fund yields compared with the FTSE All-Share are “largely irrelevant” and, second, historic yield fails to take into account dividends that may be paid in the future.

Adviser Fund Index panellists are also sceptical. “We tend to use total-return-type products,” says Justine Fearns, head of research for AWD Chase de Vere. “The changes will not stop people investing in Neil Woodford’s funds – they like what he does. People invest in funds if they like the process and there are consistent total returns.”

Chris Wise, senior investment consultant at Bentley Jennison Financial Management, agrees and says income is largely irrelevant to his selection process.

Wise says: “We make a macro asset allocation call and if we decide to invest 50 per cent in UK equities, we ask, who are the best managers? We want best of breed – it does not matter if the fund is in the UK equity income sector or UK all companies.”


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