Changes to the IA UK Equity Income sector will put funds that are genuinely trying to deliver income into a consistent peer group, according to fund managers such as Troy’s Francis Brooke, Threadneedle’s Richard Colwell, Neptune’s Robin Geffen and Royal London’s Martin Cholwill.
On Thursday the Investment Association announced changes to the much-discussed IA UK Equity Income sector following a review. A number of funds – including Invesco Perpetual Income, Rathbone Income and Schroder Income – have been removed from the sector in recent years for failing to meet its yield target.
The sector’s yield threshold over a three-year rolling period has been reduced to 100 per cent of the FTSE All Share’s, down from 110 per cent. The one-year threshold remains at 90 per cent.
Any fund that fails to reach these targets will be removed from the sector, the IA said in a statement.
Additionally, funds in the IA Global Equity Income sector will also now have a yield target of 100 per cent of its respective index - the MSCI World Index - over a three-year rolling period.
Galina Dimitrova, director at Capital Markets, said: “The decision to lower the yield hurdle has come after comprehensive consumer research and industry consultation.
“The change is designed to ensure that consumers and advisers have better visibility of the choice of equity income products that exceed their respective market yields.”
Darius McDermott, managing director of FundCalibre, said: “[The changes] mean that UK equity funds aiming to produce a yield can be compared fairly and easily, which has to be a good thing.
“Importantly, it also means fund managers are not being forced to chase a yield, and possibly even deviate from their investment strategy, just to remain in a sector.”
Below FE Trustnet rounds up the reactions of income fund managers currently in the IA UK Equity Income sector.
Francis Brooke – Trojan Income
“I am very pleased and I congratulate the IA on this decision because I think it is definitely in the interest of investors – which is what is most important,” the FE Alpha Manager said. 
“It will keep all the funds which are genuinely trying to deliver income and income growth in the same grouping and I think that this very good news.”
The manager says he welcomes the fact that some of the funds that have been separated from the income sector will return to the IA UK Equity Income sector.
“I am sure they should all be together because that means investors can make an informed decision by choosing the fund they want from a peer group that is consistent,” he added.
Brooke’s fund has grown its dividend every year since its launch in 2004. It currently yields 3.65 per cent, compared to the FTSE All Share’s yield of 3.49 per cent as of January.
Brooke (pictured) thinks that 3.5 per cent in a low inflation environment is an attractive yield and that by reducing this premium from 110 per cent to 100 per cent it means that funds will not have to stretch to generate a yield that might be too high.
He says that one of the risks of income investing is that if yield targets are too demanding some managers may be forced to convert capital into income, but the lower threshold should help to mitigate.
Brooke’s £3.2bn, five crown-rated Trojan Income has been a consistent performer, sitting the top quartile of the IA UK Equity Income sector over three and 10 years.
Indeed, over the last decade the fund has returned 136.07 per cent – placing him second in the sector –and is 59.67 percentage points ahead of the FTSE All Share.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
“What I’ve always tried to do is to balance the return from capital and income rather than bias the return too much towards income or capital,” he added.
“This new requirement for the sector will, I believe, enable managers to be able to do that and that is definitely in the interest of investors in my view.”
Richard Colwell – Threadneedle UK Equity Income
“As one of the largest UK equity income investors we were engaged in the sector review process and made a substantive contribution to the debate – we support the outcome of the review,” he said.
“It is important that the IA UK Equity Income sector is strong, well populated and credible for investors.”
The manager has run the £3.5bn Threadneedle UK Equity Income fund since 2010, during which time the fund has returned 125.06 per cent, 33.45 percentage points ahead of the wider sector.
Performance of fund vs sector since manager start
Source: FE Analytics
The five-crown rated fund, which holds 51 positions and includes GlaxoSmithKline, Imperial Brands, Shell and Unilever among its top 10 holdings, currently yields 3.8 per cent.
“We aim to achieve attractive income as part of total return and have achieved the existing 110 per cent yield hurdle without distorting how we run our funds,” Colwell said.
“The new yield hurdle will not change our investment approach, but should benefit clients in allowing some more flexibility through the cycle.”
Robin Geffen – Neptune Income
“In spite of today’s decision we will continue to target a 110 per cent yield relative to the FTSE All Share,” the manager said.
The £208m Neptune Income fund, which currently yields 4.67 per cent and has a high weighting to financials, has been a top performer over one and three years – returning 30.44 per cent over the latter period.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
“Investors have bought the Neptune Income fund on the understanding that the fund has a specific income-focus, and as such we believe it is our duty to the client to continue to run it on that basis,” Geffen said.
“In the interests of transparency and treating both prospective and existing customers fairly, we think it is crucial that the fund’s core principle remains intact.
“In today’s low yielding environment, a high and diversified income stream from equity income funds is a huge help to investors. The Neptune Income fund has long prioritised a high and rising income, and will continue to do so.”
Martin Cholwill - Royal London UK Equity Income
“We welcome this move and think it is a sensible response to meeting client needs in a low interest rate world,” the manager said.
“Having all equity income strategies under the same roof will provide clients the clarity they need to make the right investment choices for them.”
Cholwill runs the four crown-rated, £1.7bn Royal London UK Equity Income fund which currently yields 3.92 per cent.
The fund has been a consistent performer, sitting in the top quartile of the IA UK Equity Income sector over one, three, five and 10 years.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Indeed, the fund has returned 120.93 per cent over the last decade, beating the sector and FTSE All Share benchmark by 50.69 and 44.53 percentage points respectively.
In the fund’s latest factsheet, the manager said the portfolio is “underpinned by cautious economic growth assumptions and its focus on strong market positions, cashflow-backed dividends and robust balance sheets” which should “provide resilience in a whole range of possible economic outcomes”.