The consultation paper begins by acknowledging its equity income sectors “have been a particular area of debate within the IA sectors scheme for many years.”
The paper brings into question the continued suitability of the IA’s 110% of the index over three years requirement for inclusion in the sectors.
The IA noted that some “high profile funds” have been bounced out of the sector over recent years due to failing to meet this threshold, which has “attracted controversy”. It added that “market cycles and statistical calculations can conspire to produce results that seem at odds with the original intentions.”
Schroders and Invesco Perpetual are among the major firms who have seen their income products fall foul of these rules recently.
The IA is therefore seeking comments from the industry over the coming weeks on “whether the current yield requirement is fit for purpose”. Responses are invited up to 13th May.
Possible options the IA sets out are retaining the current 110% hurdle, dropping it to only requiring that the fund beats the index by any amount, or removing the yield hurdle entirely, with inclusion in the equity income sectors based on disclosures.
Laith Khalaf, senior analyst at Hargreaves Lansdown welcomed the move, but urged the IA to go further.
“The current UK Equity Income rules reward failure and punish success,” he said. “They lead to the absurd situation where an income manager can get kicked out of the sector because they have done a good job in growing investors’ capital. It’s high time the UK Equity Income sector definition was reviewed to stop good funds being expelled from the sector on a technicality.”
“It’s positive that the Investment Association is tackling this issue, however in our view the proposals reported so far either don’t do enough to ensure investors are getting a premium income, or shove this industry hot potato onto the investor’s plate, which simply isn’t fair,” Khalaf continued. “Investors in UK Equity Income funds just want to know their fund is doing what it says on the tin.”
