Fund managers from Kames Capital have criticised the recent decision by the Investment Association (IA) to lower the yield hurdle for UK equity income funds to be included in its official sector.
Douglas Scott and Iain Wells, co-managers for UK equity income at Kames, said the changes made “no sense” and will potentially cause confusion to the wider market.
In April the IA lowered the yield hurdle from 110% to 100%, meaning funds that fail to achieve this yield relative to the FTSE All Share on a three-year rolling period would be excluded from the IA’s UK equity income sector.
IA sectors are used widely as a fund selection guide.
Scott and Wells said the yield requirements have been lowered so much that the sector was “redundant” and said some funds previously excluded would now be allowed back in.
Wells said: “A UK equity income fund should offer a premium yield relative to the market, otherwise is it not just a UK equity fund? It makes no sense to lower the hurdle to being classed as an income fund, and means that such a fund now only needs to yield as much as the market, which is a confusing message to send the wider public.”
He said the move arguably had “more to do with accommodating bigger groups that have been unable to meet the previous 110% requirement”.
Referring to a traditional English/Irish music hall song, Scott said: “This move is good news for some in the IA ‘Hokey Cokey’ UK Equity Income Fund sector. Some that were ‘out’ can now be ‘in’, which basically implies if you’re big and don’t like the game, ask for the rules to be changed!”
The Kames UK Equity Income Fund since launch in 2009 has yielded an averaged of 21% above the FTSE All Share and an initial investor last year received an income of 7.2% on their initial investment, the two managers said.
The IA did not add to its original comment made in March when Galina Dimitrova, capital markets director at the IA, announced the change.
At the time she 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.
“As ever, we will continue to monitor the fund market to ensure that all of the IA sectors reflect the wide range of products the asset management industry has to offer savers around the world.”
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