Unlike the UK Equity Income and Growth Sector, the Global Equity Income Sector is likely to be around for a while.
The division of the UK Equity Income Sector, which occurred in January 2009 following a review in the previous year, lasted for only 19 months before being reversed.
Originally the decision was made to create a UK Equity Income and Growth Sector to accommodate funds that failed the yield test (110% of the FTSE All Share yield at the fund’s year-end) of the solely income-focused sector.
By July 2010, however, it had become clear this earlier rationale was not favoured by some members (naming no names, but one fund house in particular has a huge amount of cash in the sector and so perhaps had a lot of clout in the discussions).
Learned from its mistakes?
The difference about the IMA’s latest foray into sector creation is that one of the biggest players in the field, the £1.6bn M&G Global Dividend Fund has taken itself out of the game.
According to M&G, the fund has not moved into the Global Equity Income Sector and has remained in the straight-up Global Sector because of its focus on delivering “total return by generating capital growth as well as income” and because the new sector is currently small.
Jonathan Willcocks, managing director and global head of retail sales at M&G Investments, said: "The M&G Global Dividend Fund focuses on selecting companies with a consistent record of increasing their dividends, as this demonstrates they are growing their business in a disciplined manner. Being forced to run the portfolio with a prescribed yield target could compromise a fund manager’s ability to deliver performance."
In addition, he did not think the comparison of the M&G fund’s total return approach with high yield strategies seemed appropriate.
Finally, he said: "Placing the M&G Global Dividend Fund in the new sector would mean comparing it to, currently, only 19 other funds, rather than 200 funds in the Global Sector. We believe in the more challenging competitive peer-group universe of the Global Sector."
Interestingly, last year the M&G fund easily achieved the Global Equity Income Sector’s yield target of 110% of the MSCI World Index, as it had a 3.5% yield, compared to a 2.94% yield from the index.
So arguably, its point that it does not want to be lumped in with high yield funds is moot, since there are plenty of dividend paying stocks across the globe paying more than 2.94% which are not considered high yield per se.
Still, for its own motivations M&G has decided to remain outside the Global Equity Income Sector and this is one reason the sector could turn out to be a success.
A genuine need
Rather than representing mere politicking from some of the big guns, although notably the £2.1bn Newton Global Higher Income Fund has opted to list in it, the new sector seems to stem from a genuine attempt to separate funds that are doing something different.
There will undoubtedly be some discussion in the months to come as to whether the yield target has been set too high or too low, but that is something the IMA has promised to keep under review and revisit after a year.
To put in context, of the approximately 2,400 stocks in the MSCI World Index, around 1,000 of them yield more than the index, so generating a yield of 110% of the MSCI World Index yield should not be as tough to hit as the same target was for some UK Equity Income counterparts.
The fact this is an entirely new sector in a less-established space also differentiates it from the UK Equity Income and Growth debacle as the UK Equity Income sector was long established and some major players were unable to put aside their vested interests.
Comparatively, Global Equity Income is a new focus, with most funds only established within the past three years.
If one thing is certain, the IMA will be hoping there’s not a repeat performance of the like seen during the split and reversal of the UK Equity Income Sector.
The fact it is in no rush to create a European Equity Income Sector further suggests it has learned from its mistakes, as Portfolio Adviser understands the idea has been shelved for the time being due to differences of opinion between fund groups and a general lack of interest.
Next up, the Absolute Return Sector review. More on that soon…
