The Investment Association (IA) has suspended some of its guidelines for the IA UK Equity Income and IA Global Equity Income sectors as analysts predict a sharp fall in payouts this year as a result of the coronavirus epidemic.
New guidelines have been issued by the asset manager trade body as companies suspend or cut payouts as the Covid-19 lockdown measures continue to impact businesses around the world.
The suspension of dividends will have a considerable impact on equity income strategies and means that some funds may be unable to meet requirements to remain in the IA UK Equity Income and IA Global Equity Income sectors.
In the past, the trade body’s stringent guidelines have seen a number of well-known funds and managers leave or ejected from the competitive IA UK Equity Income sector.
Both sectors will see the suspension of guidelines based on the annual and three-year rolling average yields of the FTSE All Share and MSCI World indices.
The IA UK Equity Income sector is home to 87 funds and has funds under management of £46.1bn, while the IA Global Equity Income contains 57 funds and assets of £15.8bn.
Concerns have been raised in recent months over the ability of companies to continue paying out dividends given the economic conditions and political environment.
Source: Link UK Dividend Monitor
New guidelines, said the IA, are designed to prevent any short-term disruptions to these sectors, allowing investors to continue easily identifying and comparing equity income strategies.
It will also prevent fund managers from having to make any immediate changes to their portfolios just to meet sector requirements, the trade body noted.
As such, the enforcement of the annual yield threshold test – ensuring funds deliver 90 per cent of the yield of their respective benchmark – has been suspended for funds with a year-end after February 2020. The suspension of this key guideline will last 12 months and means any fund not meeting the annual yield limit will not be automatically removed from their sector.
Another key guideline – a rolling three-year test ensuring funds deliver in excess of 100 per cent of the benchmark – has also been suspended, with the IA set to review the application of the test “as the markets settle and the outlook clears”.
“The IA’s sectors play a valuable role in helping savers navigate the fund market and make meaningful like-for-like comparisons,” said IA director of policy, strategy and research Jonathan Lipkin.
“The measures we’ve introduced today will continue to provide savers with transparency on fund performance, while helping prevent short-term disruption to the equity income sectors, which are particularly affected by the economic consequences of Covid-19.”
Monthly monitoring data will continue to be published publicly on the IA’s website, ensuring ongoing transparency for investors and up-to-date information about fund performance. 
Colin Morton (pictured), lead manager of the £710.4m Franklin UK Equity Income fund, said the move was not a big surprise as companies struggled with the coronavirus impact.
He said: "This exogenous crisis is understandably taking a toll on dividend policies and the IA’s decision to suspend equity income yield requirements for 12 months seems a sensible approach given the current environment.
“We previously shared our views on dividend suspensions/cuts. As active long-term investors, we view the changes in dividend policies, for select companies where underlying fundamentals remain healthy, as a prudent approach taken by some management teams to preserve cash and ensure adequate liquidity during this crisis."
"This is a sensible move by the IA,” said Adrian Lowcock, head of personal investing at investment platform Willis Owen. “With so many companies unable to trade because of the lockdown, and many not even reporting results – let alone dividends – scrapping this requirement will at least remove an unnecessary hurdle for fund managers.
“It will take the pressure off fund managers to try and maintain dividends in what are extreme conditions, help protect investors as fund managers will not have to chase income by clustering into a minute number of companies who are still able to pay dividends, or take extra risk in chasing yields.”
Lowcock added: “The only worry is whether a 12-month suspension turns out to be long enough, but the IA can always revisit this down the line if needs be."