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Growing pains

Chris Salih on why the IMA’s UK equity income & growth sector is failing to win new friends

Advisers have never viewed the creation of the IMA UK equity income & growth sector as one of the Investment Management Association’s better decisions and recent Morningstar research will do little to change that view.

The survey found only one of the 18 funds in the sector Halifax UK equity income failed to meet the yield requirement of 3.43 per cent, which is 110 per cent of the FTSE All-Share yield on January 12, 2010. The average yield was 4.85 per cent.

The IMA launched the new 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.

Woodford’s income and higher-income funds now yield 5.13 and 5.35 per cent respectively.

The IMA claims its consultation acknowledged the composition of market yield was changing fast and that this would be consistently monitored. It is set to review the sectors later this month.

Hargreaves Lansdown investment manager Ben Yearsley says: “I have always said the sector was pointless and as long as you match the income of the FTSE All-Share yield, it should be fine.

“The funds have scope and flexibility but that is not enough to justify a new sector. I did not see the point then and I do not see it now.”

Principal Investment Management investment manager Joe Wiggins says the reason for the sector’s creation still holds, given it offers clear
guidelines to funds such as those chasing capital return over yields a bane highlighted by some UK equity income managers prior to the split.

He says: “The problem is that historic yield data can shift very quickly meaning we could see more funds jumping from one sector to another and the key for most funds is stability.

“People like Woodford and Geffen focus on offering consistent yields, so the message to IFAs and clients is to focus on funds’ underlying objectives, and not so much on the specific sectors.”

Aberdeen co-head of multi-manager Aidan Kearney says while the move has not altered his team’s investment process, it may look to move back into UK equity income once it has completed a year in the new sector.

He says: “The important thing is that it did not have an impact on our process. But you have to consider that, within the Abedeen multi-manager income fund, only one underlying holding was in the UK equity income & growth sector in the shape of Neptune income.
“We have not asked to move out of the sector but this is something we are likely to do.” founder Justin Modray says: “The future of the sector depends purely on the climate for dividends. If it continues as it is, I cannot see many funds looking to move there. However, 12 months ago, yields were hard to come by, given what was happening with the likes of the banks.

“Any change can happen so quickly and most funds will just be aware of not playing musical chairs between the two sectors.”


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