Investment Association eyes UK Equity Income reform


The Investment Association has launched a consultation over how to best to monitor the levels of income for funds in the UK Equity Income sector.

Currently yield is calculated by taking income produced during the year as a percentage of the price of the fund at the end of the year. Therefore if a fund has increased its capital this has the effect of reducing the yield.

A fund qualifies by maintaining an average yield of more than 10 per cent than the FTSE All Share over a three-year period.

Invesco Perpetual’s income range, as well as the Schroder Income and Jupiter Responsible Income funds, all sit in the UK All Companies, rather than the UK Equity Income sector, for having produced insufficient income under the current rules.

Three options are being put before asset managers in the consultation including lowering the bar so funds only have to perform better than the index or to produce more statistics about their performance.

A final option is to make no change to the sector definition – a situation Hargreaves Lansdown senior analyst Laith Khalaf is “untenable”.

He says: “The key to creating a rising dividend stream for investors is building capital, yet managers are being penalised for taking this long-term approach. We believe the best solution for the sector is to calculate a fund’s yield based on its price at the start of the year, not at the end.”

Khalaf says lowering the bar for qualification to the UK Equity Income sector would not do enough to ensure investors were getting more income from funds than the index could provide.

He adds the option for funds to produce more in-depth income statistics was not in the best interests of investors, who did not want “reams of numbers thrown at them”.

Hargreaves Lansdown’s proposal is to base qualification on income produced for each £1 invested at the start of the period. In this scenario, funds that both grow or shrink in capital may still remain in the sector if they return the same yield.

It said the sector rankings would then speak for themselves in terms of overall performance.