You are here: Home - Investing - Experienced Investor - News -

Yield hurdle lowered for UK equity income funds: what it means for investors

Written by: Adam Lewis
The trade body which represents the UK funds industry today lowered the yield requirement for funds which sit in the UK Equity Income sector.

After an extensive consultation period with consumers, financial advisers and product providers, the Investment Association (IA) has decided to lower the yield requirement for a fund to be part of the IA UK Equity Income sector.

Previously for a fund to be included in the sector it needed to yield 110% of the FTSE All-Share Index over a rolling three-year period. However, after several high profile funds were removed from the sector for not meeting this target – including Invesco Perpetual Income and High Income, and Rathbone Income – the IA has decided to lower this hurdle to 100%.

According to the IA any fund which now fails to achieve 90% of the index yield in any one-year period will be removed from the sector.

Why is this change important for investors?

The IA creates sectors to allow investors to compare funds on a like-for-like basis. For example there is little value comparing the performance of a US fund against a UK fund, so by placing funds in specific peer group investors can gauge how a manager has performed over different time periods.

However, after several high profile omissions from the UK Equity Income sector – which houses some £57bn assets under management – critics argued managers were being pushed into high yielding and potentially risky areas of the market just to remain part of the sector.

Galina Dimitrova, director of capital markets at the IA, said: “The primary purpose of the IA sectors is to serve the needs of consumers and their advisers. Any change to how they are classified must be done in their best interests.

“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, welcomed today’s announcement, saying it should make life easier for investors and intermediaries.

“It means that UK equity funds aiming to produce a yield can be compared fairly and easily, which has to be a good thing,” he said. “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.”

The IA is now inviting its members to submit funds they believe meet the new sector definition and criteria, which will be effective from 3 April.

Indeed McDermott expects the majority of the 20+ funds removed from the sector in recent years to go back in, in the coming months.

To ensure there is consistency for consumers and advisers across the equity income sectors, funds in the Global Equity Income sector will also now have a yield target of 100% of its respective index – the MSCI World Index – over a three-year rolling period.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Your right to a refund if travel is affected by train strikes

There have been a wave of train strikes in the past six months, and for anyone travelling today Friday 3 Febru...

Could you save money with a social broadband tariff?

Two-thirds of low-income households are unaware they could be saving on broadband, according to Uswitch.

How to help others and donate to food banks this winter

This winter is expected to be the most challenging yet for the food bank network as soaring costs push more pe...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week