Fundsmith founder Terry Smith has panned the decision by the Investment Association to lower yield thresholds for funds in its UK Equity Income sector due to the effect of coronavirus on company dividends.
The UK trade body announced last week it would no longer automatically eject funds from the sector that fail to meet the annual 90% yield threshold over the next 12 months. More than £25bn worth of dividends have been cut by UK corporates since the Covid-19 pandemic took hold.
Smith wrote in a Financial Times article published on Thursday morning that the fact funds only had to achieve 90% of the yield of the FTSE All Share index showed the requirements were not exactly stringent to begin with.
Alongside the 12-month threshold, funds must also exceed the rolling three-year yield.
Smith continued: “In a ridiculous piece of deception, which I suspect would not be permitted in any other product, a fund can lose its Investment Association status and still carry the word ‘income’ in its title.
“To paraphrase a common saying, ‘It doesn’t do what it says on the tin’.”
Smith continued that he does not think investors should purchase equities for income in the first place. The average IA UK Equity Income sector fund has lost nearly 1.3% annually over the past five years, he noted.
“The best way to approach this is to invest for the highest total return you can achieve and sell whatever shares or units you need to provide cash.”
Nevertheless, he offered a tip for investors who take a different view.
“If you insist on investing for dividend income, consider investing alongside a family which founded and has control of a public company. Out of the 47 stocks in the Stoxx Europe 600 that are ‘family influenced’, only three have cancelled or postponed dividends.
“Very often these extended families, descended from the business founder, rely on the dividend income from the family business.
“The chief executive of one of the family-controlled companies we invest in at Fundsmith says his first piece of advice from the patriarch of the family was to never cut the dividend. Investing alongside them can help to preserve your income too, and in this market environment you may get some attractive opportunities to do so.”
Within the Fundsmith Equity fund, the Bettencourt family own a sizeable chunk of French cosmetics brand L’Oreal, while Finnish elevator company Kone is a family-controlled business.
In the US, Estee Lauder and Brown Forman are also multi-generational family businesses.
