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IA lowers fund entry barrier for UK Equity Income


The Investment Association has decided to lower the yield requirement for funds to enter its UK Equity Income sector from 110 per cent to 100 per cent following a “comprehensive consumer research and industry consultation”.

The investment trade body started a consultation in April canvassing opinions of end investors and advisers on its review of the sector, after opinions of asset managers were split.

Despite the new lower yield to be achieved over a three-year rolling period, if a fund fails to achieve 90 per cent of the index yield in any one year period  it will still being removed from the sector.

The changes take effect from 3 April and will also affect funds in the Global Equity Income sector, which will need to have a yield target of 100 per cent of the MSCI World Index over a three-year rolling period.

The move has been done to guarantee “consistency” among consumers and advisers in the equity income sector.

Among many critics to the sector’s former requirements is Hargreaves Lansdown.

The group recently questioned the sector’s relevance, calling it “badly constructed”.

Hargreaves Lansdown points out that 22 funds – or 20 per cent of the sector – have been excluded so far. Hargreaves argues “the rapidly declining relevance” of the sector has been pointed out by the fact that star fund manager Neil Woodford is placing his new Income Focus fund into the Specialist sector instead.

Woodford IM declined to comment.

However, Hargreaves Lansdown senior analyst Laith Khalaf says while the new yield criteria is an improvement, it will not solve the problem.

He says: “They’ve made this decision because of all the funds that dropped from the sector. It’s an improvement but it doesn’t solve the problem as there’s not a way to find a solution.They are saying we’ll let more funds in the sector even if they won’t reach the target.”

IA director capital markets Galina Dimitrova says: “The primary purpose of the IA sectors is to serve the needs of consumers and their advisers. Any change to how they are classified must be done in their best interests.”

As well as keeping the current criteria, the IA considered a number of potential alternatives, including requiring funds to match the FTSE All-Share’s yield or removing the target altogether, yet calling for more statistics about the funds income and performance.

Dimitrova says: “The decision to lower the yield hurdle has come after comprehensive consumer research and industry consultation. The change is designed to ensure that consumers and advisers have better visibility of the choice of equity income products that exceed their respective market yields.”

FundCalibre managing director Darius McDermott says the change is “a very sensible move”.

He says: “It means that UK equity funds aiming to produce a yield can be compared fairly and easily, which has to be a good thing.

“Importantly, it also means fund managers are not being forced to chase a yield, and possibly even deviate from their investment strategy, just to remain in a sector.

“It is also good that the same criteria will be applied to the global equity income sector to keep things simple and consistent.”

McDermott expects the “majority” of the 22 funds removed from the sector to go back over in the coming months.



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