The move comes following research from the trade body which has established that many funds in the sector are not in compliance with the current yield target of 110 per cent of the FTSE all-share and are unlikely to reach that target by the end of year deadline.
The decision, which is expected to be formally announced tomorrow morning, follows a meeting between the IMA board and the Performance Category Review Committee last week.
The IMA plans to remove all UK equity income funds that fail the yield test on a review of the past 12 months from December 31, 2008. The group has also amended the IMA equity income sector definition to take into account the final distributions at the fund’s year end.
Those that fail will move into the UK equity income and growth sector, provided that they meet the sectors own definition, which is that funds invest at least 80 per cent of their assets in UK equities and aim to produce a historic yield of 90 to 110 per cent of the FTSE all-share yield at the fund’s year end.
Funds that move from UK equity income to the new sector will be allowed to retain their track records. Other funds will also be allowed to join the sector provided they can comply with the requirements now and on an on-going basis. Track records for those funds may not be retained.
Those members looking to clarify their position with regards to the new changes, such as those not currently meeting the yield requirement in the IMA equity income sector but believe they will shortly be able to do so, have been asked to contact the IMA by January 14, 2009.
The IMA has also written to firms with UK equity income funds to ascertain whether the yield figures for monitoring are correct, whether the fund expects to meet the yield parameter by year-end, whether the fund charges fees to income or capital and whether the fund group would be able to supply figures for monitoring purposes directly to the IMA for an interim period.
The IMA also intends to review yield requirements and may look to change the yield target should market conditions dictate.
T. Bailey analyst Elliot Farley says: “We’ve said all along that if a UK equity income fund can’t regularly make 110 per cent of the yield of the FTSE all-share index it isn’t really trying and therefore doesn’t deserve to be called an income fund.
“Introducing an income and growth sector with a lower band of 90-110 per cent of the yield of the FTSE all-share index sounds like a pacifier to those very big so-called income funds which may be good at growth but don’t make the grade on income. There’s already a sector for them, it’s called the UK all companies sector. All this will achieve is to confuse matters and lead to funds yo-yo-ing between sector definitions.”