Save, make, understand money

Experienced Investor

Consumers views wanted on future of UK Equity Income sector

Written By:

The trade body which represents UK investment management groups, the Investment Association (IA), has announced it will conduct consumer research to help decide the future of the UK Equity Income sector. 

A perennial favourite sector among UK retail investors given its provision of dividends, the UK Equity Income sector is the fifth largest of all IA sectors, housing some £59bn of assets under management.

However in April the IA announced it was to conduct an industry wide review of the peer group regarding whether the existing requirements of funds being included in the sector were fit for purpose.

This followed the expulsion of a number of high profile funds from the sector for not meeting the IA’s strict yield requirements. These requirements are that a fund must generate 110% of the FTSE All-Share index’s yield over rolling three-year periods.

After a near 50/50 split between those in the industry who wanted to remain with the current status-quo and those who felt change was needed, the IA has now called on the opinion of investors and their advisers on how they identify UK equity income funds and whether the existing definition is helpful in supporting their objectives.

The research will be conducted by YouGov in September and the results will help the IA’s Sectors Committee to decide between the following three options:

  • Option 1 – No change to the existing sector definition.
  • Option 2 – Replace the current 110% hurdle with a requirement to generate a higher yield than the FTSE All-Share over three year rolling periods. Retain the 90% yield requirement over one year. Demonstrate that an above market average income is an objective of the fund in product or client documents. Other sector criteria unchanged.
  • Option 3 – Require specific disclosure in relation to income (eg net yield, absolute net income generated over five years for £100 investment, income growth, total returns, volatility, whether the fund is structured to optimise dividend distribution (i.e. charge fees to capital not income)). Accordingly, the yield hurdles in the current definition would be removed.

After the consumer research is conducted the IA Committee will evaluate all the views with the intention of making a final decision on the sector’s definition by the end of this year.

Galina Dimitrova, director of capital markets at the IA, said: “Following extensive consultation with our membership, we felt that it was essential to engage with consumers before making any decision about the future of the sector.

“Alongside the consumer research, we encourage all users of the sectors to share their views with the Investment Association in the coming weeks.”