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.