“Overall, I think this should help improve the visibility of outcome funds among investors.
“Previously, you had a number of funds lumped in the Unclassified sector, which ended up being more of a dumping ground for all sorts of funds. And the sector name itself didn’t really give any guidance as to what ‘unclassified’ means.”
However, she cautions that the range of risk outcomes in the sector is still troublingly large, meaning advisers and investors still need to look closely at the fund to make sure they’re comparing like for like.
She added: “The IA has recognised that to some extent and is not listing any performance comparisons for the peer group, which does acknowledge that some have different benchmarks and risk characteristics.”
The IA’s UK Equity Income sector has also ruffled some feathers over its hotly contested dividend hurdle, which requires funds grouped in the sector to yield 10% above the FTSE All-Share over a rolling three-year period.
This has led to the expulsion of several high-profile funds from the sector within the past year.
On the subject of updates to the IA’s Equity Income category, Smith & Williamson manager Tineke Frikkee, “wholeheartedly agreed” in spirit with the trade body’s decision to lower the dividend hurdle to match the FTSE All-Share, thereby broadening the sector.
But she feared that by listening to all the noise and discontented fund managers, the IA might have made things slightly more complex for consumers.
“Equity income is meant to at least yield more than the market,” she said.
“What I’m not certain of is whether this helps the consumer. The role of the IA is to try to create sensible groupings of funds so that investors can compare apples with apples or at least apples with oranges, rather than apples with chickens.
“This Made it slightly more complex initially people knew if I invest in that sector every fund will provide a dividend income at least 10% more than the market.
“But now there will be more funds that deliver an income that is similar to the market. That’s still OK, but I can’t help but think it is less helpful than before.”
However, in her view, lessening the yield requirements of the sector was preferable to the other alternative being bandied about – scrapping the sector entirely.
“The worst outcome for me would have been if they had given up on the UK Equity Income sector and merged the funds with the UK All Companies category. In order to differentiate in a group of 500 is impossible.”
Moving forward, Frikkee thinks the UK Equity Income sector could benefit from a little more nuance. Two ways of doing that would be to account for differences in volatility and track
“I still think the whole area of funds can do with some subcategories or other ranking tools,” she said.
“The technology is there. And the more discerning investor, like the fund to fund manager, already does that.”
