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Dog fight

The equity income sector must be hellish for fund management firms to make their mark. It is full to the brim with experienced fund managers but if your name is not Woodford, Frost, Nutt or Luckraft, it is difficult to get a look in, no matter how good you are.

But in recent months, there has been growing criticism from a few companies (some of which have been lambasted for poor performance) that they are not being judged on a level playing field.

Take JPM premier income, for instance, a sizeable fund sold by many IFAs which has been named and shamed in the latest Bestinvest Dog guide for three years of rather lacklustre performance. Perhaps not surprisingly, it was only too willing to put its side of the story.

The group told me: “The dog fund guide looks at total return. It does not look at the yield. Very few funds in the equity income sector yield 3.8 per cent, as ours does. Many yield less than they are required – 110 per cent of the FTSE All Share index.”

I bet a certain Toby Thompson at New Star feels the same way. He intends to buy stocks yielding at least 120 per cent of the average FTSE all share index and to sell when the yield falls back to the average. No wonder he has been trumped by those with total return in mind.

It is perhaps not surprising that the IMA has lost its patience with a sector that has become a mishmash of different offerings. Many equity income managers do not play for just yield – capital growth is often high on the agenda.

I recall George Luckraft in his ABN Amro days telling me of his “barbell” strategy. At one end of the bar were the high-yielding equities and convertibles while at the other end, growth stocks were brought in to balance the high yielders.

In the pre-tech bubble days Luckraft was tinkering with the idea of hunting for growth and was scouring the technology sector for ideas.

There is absolutely nothing wrong with the strategy if that is what you want out of an equity fund. It is a strategy that for the most part has been extremely successful and has rightly won Luckraft many plaudits.

But the IMA has decided to change the definition of the UK equity income sector so it now includes “funds which invest at least 80 per cent in UK equities and which aim to achieve a yield on the distributable income in excess of 110 per cent of the FTSE all share yield”.

The move coincides with Liontrust’s new comparison table that allows investors to choose an income fund according to their requirements.

If you are looking for an investment fund which produces the highest yield, the table will show which are top of the pops. Alternatively, you may prefer to reinvest your dividends and opt for best total return over three years.

Liontrust’s table (to be found at fundfact.com) aims to clarify the growing confusion surrounding the definition of income funds or in its words make the equity income sector “fair game”.

So if you decided to rank the funds on the basis of total return over three years, then Invesco Perpetual’s highincome fund would emerge at the top of the tables. Yet on income alone, it is an entirely different scenario. The New Star higher-income fund and JPM premier equity income would be among the best performers. The new yield tool also allows funds to be ranked by the tenure of the fund manager or by the number of years that the fund dividend has grown.

I certainly do not blame the likes of New Star and Newton (formerly managed by former Thompson) agreeing to be sponsors of the innovative table. It will help them get their message across that their funds are not necessarily laggards.

Liontrust says it would like to see any flouters of the IMA guidelines kicked out of the equity income sector. I am not convinced that the likes of Neil Woodford will be trembling in their boots and I doubt that his investors care too much which sector his fund sits in, given his track record.

But the new service does gives others a chance to promote their wares to investors wanting a growing income stream and it also adds to the debate.

Besides, Liontrust may well be on to something here – within days, 6,000 people logged on to test the table out.

Paul Farrow is personal finance editor at the Telegraph Media GroupMoney Marketing

50 Poland Street, London W1F 7AX

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