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The exile files

The Investment Management Association has brought an end to months of uncertainty by unveiling the constituents of its newly launched UK equity income and growth sector.

After what seemed like endless bickering, a total of 17 funds have been placed into the new sector, which has funds which invest at least 80 per cent of their assets in UK equities, aim to have a historic yield on the distributable income in excess of 90 per cent of the yield of the FTSE All Share index at the fund’s year-end and which aim to produce a combination of income and growth.

The list includes the great and good of fund management, with Invesco Perpetual income and higher income manager Neil Woodford and Neptune income manager Robin Geffen the two big boys jumping to the new sector.

Of the 17 funds to move, 15 come from the UK equity income sector, the majority of which requested the move. All of them will keep their track records.

The move has been seen criticism from advisers and fund managers.

A number of fund groups had pushed for the move, pointing to the fact that “yield offenders” are topping the IMA UK equity income sector purely on the back of performance without any attention to yield.

However, with dividend cuts likely to be rife this year, could it be those who have made the move have the last laugh as many stuck in the UK equity income sector search for safe havens to achieve the required benchmark of 110 per cent of the FTSE All-Share?

Hargreaves Lansdown investment manager Ben Yearsley says more funds are likely to move across to the new sector as the search for yield gets tougher. He says: “It would make sense for more managers to move. The new sector is so much easier as it has fewer constraints for fund managers at a time when yields will become harder to achieve with dividend cuts set to grow. It reinforces the opinion that the sector is a waste of time when they could just change the UK equity income mandate.”

Speaking earlier this year, PSigma income man-ager Bill Mott said although the IMA decision was fair, it could force managers on to the defensive as the recession hardens.

He said: “If a fund has a total return mandate for income, you will have to go to places such as utilities, tobacco and pharmaceuticals. The problem is that as all the managers go into those spaces, the valuations of companies are set to rise.”

Invesco has already made similar comments, claiming that the IMA’s move forces managers to focus on short-term yield at the expense of the long-term balance between income generation and capital growth.

T Bailey fund manager Jason Britton says the IMA is right to get tough on funds that consistently failed to achieve the UK equity income sector’s target yield of 110 per cent of the yield of the FTSE All-Share but it is wrong to set up an income and growth sector, given the target of just 90 per cent yield of the All-Share index.

He says: “We are in the middle of a bear market where yield is going to become increasingly attractive to investors but a large proportion of these funds claiming to be income-focused will be no such thing. That is not fair to investors.

“Our belief has long been that funds that consistently missed the UK equity income sector yield targets were not really trying, so moving into an income and growth sector where they can claim to have an income focus but actually deliver less than the average yield of the FTSE All-Share will make little difference to the strategy of these funds – it will be business as usual.”

Jupiter income trust manager Tony Nutt believes dividends in the UK are more sustainable than people think. He says the payout ratio of earnings per share for dividends across the market currently stands at 44 per cent, a figure that he says is modest but still far greater than earnings.

He says: “Dividend growth is far less volatile than earnings’ growth. That said, I would expect the overall level of dividend in the UK market to be down by 10 to 15 per cent in 2009. Its impact will mainly be felt by the very high-yielding funds.”

OPM chief investment officer Tony Yousefian says: “One could view the Investment Management Association’s decision as one which, like the Charge of the Light Brigade, was one of the least well timed.

“Shares that typically qualify for inclusion in equity income funds, like BP, are struggling to maintain dividends in the current climate. When the maelstrom eventually passes, these intrinsically strong and robust companies will resume profitable growth and ergo dividend growth.

“Why, in the meantime, disrupt the equity income sector, especially as it is understandably one of the most popular with the general public? Holders of these funds are the mainstay of the battalion of British savers and heaven knows, the base rate cuts have savaged them plenty enough already.”

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