The Investment Association suspending its equity income yield requirements will help fund managers avoid becoming forced sellers as the number of UK corporates slashing their dividends continues to climb.
The UK trade body announced on Wednesday it would no longer automatically eject equity income funds that fail to meet the annual 90% yield threshold over the next 12 months.
In addition, the IA has indefinitely shelved assessments based on three-year rolling averages of the FTSE All Share and MSCI World indices. It will review the situation as “the markets settle and the outlook clears”.
IA director of policy, strategy and research Jonathan Lipkin said the guidance change, which effects 87 funds in the IA UK Equity Income sector and 57 funds in the Global Equity Income sector, “will continue to provide savers with transparency on fund performance, while helping prevent short-term disruption to the equity income sectors, which are particularly affected by the economic consequences of Covid-19”.
IA rules cannot be reasonably applied following Covid outbreak
Willis Owen head of personal investing Adrian Lowcock said the IA’s suspension means equity income managers will avoid “having to sell holdings in order to cram their portfolio into the few companies able to sustain their dividends”.
Lowcock said the IA’s equity income rules cannot “reasonably be applied” in the current situation following Covid-19.
“Many companies are struggling to report their earnings forecast for the rest of the year let alone know what they will be able to do with dividends,” Lowcock continued.
“The likelihood is more dividends could be cut and there is little way to tell when dividends might be reinstated.”
UK corporates slash £20.5bn worth of dividends
So far 278 companies have cut their dividends, totalling £20.5bn, including 34 FTSE 100 companies, which account for 75% or £15.7bn of the slashed dividends, according to data from AJ Bell.
This compares with 90 companies that have stuck by their dividends worth £5.1bn.
On Wednesday alone four companies cut their dividends, adding another £14m to the amount that will not be paid out to investors.
AJ Bell head of active portfolios Ryan Hughes said data from the equity income sectors should be taken with a pinch of salt as it will take time for the full impact of dividend cuts from corporates to feed through into portfolio yields.
“Looking ahead there will no doubt be a wide dispersion in fund yields and therefore any investors analysing any of the income sectors should do so with caution for the foreseeable future, while in the short term it’s wise to be wary of quoted yield figures that will not be representative of what will be paid in the future,” Hughes said.
Investment trusts vs Oeics
Investment companies have not experienced the same kind of hiccups as their open-ended equity income counterparts.
There are no specific yield requirements for investment trusts to hit for them to be included in the AIC’s UK Equity Income sector.
While Oeics must pay out 100% of the income they receive each year, investment trusts can store income in reserves to be distributed across multiple years.
AIC head of intermediary communications Nick Britton said 18 out of 25 investment companies in the AIC UK Equity Income sector have enough income tucked away to pay out their last full year of dividends.
“That means that even if the income they receive from their underlying companies drops by half, they could still continue to pay dividends for two years,” said Britton.
