The number of funds in the UK Equity Income sector could grow following the Investment Association (IA)'s decision to relax its stringent yield requirements.
The IA is lowering the yield hurdle funds have to meet to be included in the UK Equity Income sector from 110 per cent to 100 per cent of the FTSE All-Share's yield over a three-year rolling period, following controversy over the number of income funds exiled from the sector. But failure to achieve 90 per cent of the FTSE All-Share's yield in any one-year period will still result in a fund being removed from the sector.
To be included in the Global Equity Income sector, meanwhile, funds will now have a yield target of 100 per cent of the MSCI World index over a rolling three-year period.
The new sector definitions will be effective from 3 April.
These changes follow a consultation into the inclusion criteria for the UK Equity Income sector which began last year, due to wide concern that the IA criteria rewarded managers who took risks on high yields rather than those prioritising sustainable dividends.
Several high-profile income funds including Rathbone Income (GB00B3Q9WG18), Invesco Perpetual High Income (GB00BJ04HQ93), Schroder Income (GB00BDD2DX75), Man GLG UK Income (GB00B0117D35), and Henderson UK Equity Income & Growth (GB0007493470) have been ousted from the UK Equity Income sector in recent years.
Darius McDermott, managing director of FundCalibre, said lowering the yield hurdle for the UK Equity Income sector "means 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. We fully expect the majority of the 20+ funds removed from the sector in recent years to go back in in the coming months."
