Fund buyers have welcomed the Investment Association’s decision to reinstate yield requirements on its two equity income sectors as the effect of the pandemic on company dividends eases.
In an update on Wednesday the industry body said due to calmer market conditions and the continued easing of the pandemic, enforcement of the one and three-year yield threshold tests for the UK Equity Income and Global Equity Income sectors should be re-instated from 24 September.
The IA suspended the yield tests for the two sectors in April last year due to the economic disruption caused by Covid-19. It said at the time the move would help fund managers focus on long-term outcomes for savers, instead of making immediate changes to meet sector requirements.
For the UK Equity Income sector, funds must achieve a historic yield on the distributable income in excess of 100% of the FTSE All Share yield at the fund’s year end on a three-year rolling basis, and 90% on an annual basis.
For the Global Equity Income sector, funds have to achieve a historic yield on the distributable income in excess of 100% of the MSCI World Index yield at the fund’s year end on a three-year rolling basis, and 90% on an annual basis.
Yield test amendments
Under the new measures, the IA is amending the three-year rolling average test to account for the impact of dividend suspensions and postponements caused by the pandemic. As such, it has made the following amendments:
– Every fund will have the opportunity to roll off one fund accounting year from the three-year average yield test.
– Each fund may only roll off one year affected by the pandemic: either a fund accounting year ending in 2020 or 2021.
– The fund has only one opportunity to choose to roll off a year. This opportunity will arise when the fund next submits yield data to the IA, beginning with funds that have a year-end in September 2021.
Pragmatic approach
AJ Bell head of active portfolio Ryan Hughes said with so much uncertainty around dividends last year, it was quite right that the IA suspended the yield tests, but it seems sensible to reinstate them as companies have resumed paying dividends.
“Importantly, the IA is taking a pragmatic approach around the three-year test given that one of those years is effectively irrelevant and this should avoid having too many issues with funds failing to meet the criteria,” he said.
“Having stability around sector classification is an important feature of the market, particularly for those building portfolios and therefore this pragmatic approach from the IA is to be welcomed.”
‘Traditional yielders’ are paying out again
GDIM investment manager Tom Sparke said it is “wholly appropriate” that the yield monitoring tests have been re-instated.
He said: “Most of the traditional yielders in the equity space are paying out dividends and for investors and asset allocators it is important that the funds do what they state they are going to.
“The UK equity income sector, in particular, is a huge part of the investment universe and makes up sizable chunks of some portfolios which rely on the dividends paid out, often for clients reliant on the income stream. If a fund’s yield drifts too low, this could have serious consequences.”
Whitechurch Securities investment manager Tim Jones said there is logic in the announcement given the manner in which UK dividends have been recovering.
“The overall value of dividend announcements and restorations from FTSE 100 constituents since March 2020 now exceeds that of any reductions or cancellations. As a result, the average yield for the main market this year is forecast to be close to 4% – quite remarkable when you consider the state of play a year ago.
However, he said some of the biggest payers on the FTSE have a dividend cover of less than one, and broadly speaking, some sectors are ahead of others in terms of being in a position to reinstate payments.
“Naturally, some countries are also ahead of their counterparts, not only in their fight against Covid generally, but in their economic recovery and ability to support the return of dividends,” he added.
“Therefore, we will be watching with interest to see how underlying asset allocations will change as a result, in order to compensate. Perhaps the ‘hunt for yield’ will favour the UK. Only time will tell.”
IA director of policy, strategy and research Jonathan Lipkin said: “The measures introduced last year helped prevent unnecessary disruption to the equity income sectors. As the pandemic eases, and markets have settled, it is right to re-establish the yield test so savers can be assured that the funds in the equity income sectors are meeting the income thresholds set out in the sector definitions.”
