Four-fifths of UK equity income funds do not allow investors to easily judge their merit as an income source as they only offer minimal income information on their fact sheets, while more than 10 per cent do not even include yield - the most basic piece of income information - research by FE Trustnet shows.Last week, FE Trustnet launched its campaign to improve income information, pointing out that fact sheets - which are a retail investors most relied on communication with their fund - include performance, managers’ comments and even awards won but often only provide yield when it comes to income.
And as noted several times, yield is a poor indicator of the actual income offered by a fund as it is calculated using the dividends paid out over the past 12 months and the portfolio’s current valuation.
As FE Research head Rob Gleeson pointed out, this is just one factor that investors should consider when assessing an income fund - and not even the most important.
The campaign has been met with broad support.
A poll on our website found that 78 per cent of investors want to see more information on fund fact sheets about income and dividends, while your comments on the original article showed a campaign for greater transparency is very popular.
FE Trustnet has since reviewed the fact sheet of every fund in the IMA UK Equity Income to determine what information each one includes and found most funds only offer minimal income information.
Most worryingly, we discovered that 13.25 per cent of the sector does not even put the fund’s historic yield on their fact sheets.
While three of these would be unable to as they have launched within the last 12 months, this still leaves 11 funds that are not offering investors even this basic piece of information.
Needless to say, these funds do not offer investors the kind of extra information our campaign is calling for, such as a pounds and pence figure on the actual dividends paid or how much an initial investment would have earned over time.
While more than half of these funds run less than £100m, not all of the funds without yield on their fact sheets are small.
The largest is Lyndon Gill’s £1.46bn SWIP MultiManager UK Equity Income, while Thomas Moore's £666.4m Standard Life Investments UK Equity Income Unconstrained and Karen Robertson's £553.5m Standard Life Investments UK Equity High Income funds also appear on the list.
Moving to the focus of our campaign, our research found that just 20 per cent of funds in the IMA UK Equity Income sector put the actual dividend paid alongside the yield on their fact sheets - meaning the vast majority only offer their investors yield at best.
Popular funds that don’t publish the dividends paid on their fact sheets include Artemis Income, Fidelity Moneybuilder Dividend, Jupiter Income Trust, Schroder Income and Unicorn UK Income.
Meanwhile, the fund groups that do make dividends paid easy to find include AXA Investment Managers, F&C Investments, JP Morgan Asset Management, Neptune, Rathbone Unit Trust Management and Royal London Asset Management.
Robert Thorpe, head of UK sales at F&C, says not publishing dividend histories ignores the fact that most investors care more about whether their actual income is growing than about a metric that shows very little in the real world.
“Putting the actual amount in pence on a fact sheet gives all investors a clear indication of whether they would have seen any income growth or not,” he said.
“Yield is a moment in time - the income paid over the last 12 months based on the fund’s valuation. It doesn’t tell you whether that yield will be as high tomorrow, it doesn’t tell you what’s happened to your capital. For long-term income investors to get a full understanding of what the income journey has been like, then you have to see evidence of its history.”
“The yield does not give you any information about the sustainability of the income paid out, whereas showing the pounds and pence paid out is a clear indication of the success of that fund as an income source.”
Thorpe argues that equity income funds should publish three key pieces of information on their fact sheets to give their investors the best idea of how it is performing - the total return; the dividends paid; and the capital return.
The last one is important, he explains, as some methods of boosting a fund’s yield can come at the expense of capital growth - which will hold back total returns over the long term.
“Capital is just as important as the income. There needs to be a greater understanding about what is happening in an income fund - is income growing, is it being maintained and how has the capital done.”
“We have seen some equity income funds that have had a policy of growing the dividend and struggled to do that so they’ve invested in areas that have caused the capital to suffer just to increase the dividend.”
FE Trustnet is in the process of contacting all groups with funds in the IMA UK Equity Income sector to find out if they are considering adding dividends paid to their fact sheets, as well as exploring other ways that could improve the amount of information available to their investors.
While we understand that space on a fact sheet is limited and precious, there is genuine demand for more information from investors.
And as funds increasingly market themselves as strong income payers, shouldn’t they attempt to offer more than just a metric which many view as meaningless?
“If putting pence paid out gives any investor greater clarity then I think there’s merit in encouraging fund groups to do that. They should consider doing that to give more information to their investors. The more information the better,” Thorpe said.
In the next article of the campaign, FE Trustnet will examine which UK equity income funds have paid out the most income since the start of the financial crisis.
