Equity Income Funds' Yield Targets Suspended

Investment Association relaxes rules for 144 equity income funds, which would have seen them ejected from the sector if they didn't match the FTSE All-Share yield

Holly Black 22 April, 2020 | 12:27AM
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Equity Income funds are to have their income requirements relaxed as a result of the Covid-19 crisis. The change will affect the 87 funds in the UK Equity Income sector and 57 that make up the Global Equity Income sector.

Trade body the Investment Association has made the changes as many companies slash their dividends to shore up their balance sheets. It said the postponing or suspension of dividend payments by many businesses could make it difficult for funds to reach their targets.

Currently funds in the UK Equity Income sector are required to at least match the yield of the FTSE All Share over a rolling three-year period, while funds in the Global Equity Income sector must exceed the yield of the MSCI World index. Funds that do not achieve at least 90% of the yield of their benchmark are removed from the sector.

Now the IA has suspended the yield test that funds must pass to qualify for the sector for 12 months, meaning any fund which doesn’t meet the annual yield limit will not be automatically removed from the group. The three-year test will also be suspended.

The Investment Association said the new guidelines were designed to prevent any short-term disruption to the sectors, so that savers can continue to easily identify and compare equity income funds. It would also ensure fund mangers can continue to focus on their long-term strategies, rather than having to alter their portfolios to hunt for yield.

Jonathan Lipkin, director of policy, strategy and research at the IA, says: “The measures we’ve introduced today will continue to provide savers will transparency on fund performance, while helping prevent short-term disruption to the equity income sectors, which are particularly affected by the economic consequences of Covid-19.”

Widespread Dividend Cuts

Indeed, in recent weeks a flurry of FTSE companies have announced plans to suspend shareholder payouts this year. Investment group Link estimates that UK dividends will more than half this year to around £46.5 billion, from more than £100 billion last year. Its research found that 45% of Britain’s listed companies have scrapped their payouts by April 8, as the economic effects of a nationwide lockdown took hold.

These moves have already hit the UK Equity Income income sector, which was the second weakest Morningstar category in the first quarter of the year. The average fund in the group was down 28% in the first three months of 2020.

The cohort includes a number of Morningstar Analyst Rated funds, among them Silver-rated Trojan Income, which is down 16.03% year to date and Silver-rated Royal London UK Equity Income, down 27.13% so far this year. The yields on these funds have leapt in recent weeks as their performance has tumbled. Silver-rated JOHCM UK Equity Income now yields more than 8% and Bronze-rated Man GLG Income more than 7.8%.

equity income

Adrian Lowcock, head of personal investing at Willis Owen, says the IA’s move is a sensible one with so many companies currently not even reporting results, let alone dividends. “This move will take the pressure off fund managers to try and maintain dividends in what are extreme conditions. It will also help protect investors as fund managers will not have to chase income by clustering into the small number of businesses which are still able to pay dividends, or by taking extra risk in chasing higher yields.”


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Holly Black  is Senior Editor, Morningstar.co.uk


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