£1.2bn Rathbone Income fund to be thrown out of the IA sector

UK-Currency-Money-Coin-Pounds-GBP-700x450Carl Stick’s £1.2bn Rathbone Income fund is the next fund on the list of the Investment Association UK Equity Income sector funds to be thrown out of the sector.

The fund will move to the companies sector on 1 May after failing to meet the IA’s requirement that funds yield 10 per cent more than the FTSE All-Share over a rolling three-year period.

The news comes as the IA consults the asset management industry about a potential overhaul of the requirements for inclusion in the sector.

In a letter sent to investors, Stick says the group is willing to contribute to the IA consultation on the matter and guarantees that the focus and objectives of the fund will not change.

He says: “The Investment Association is consulting with its members on a major and necessary reform of the sector definition, which we wholly support, but as things stand, the fund will move to the UK All Companies sector, most likely in May.”

Stick says dividends paid out by the FTSE All share were distorted by “a number” of mega caps in the sector, but added that many of these payouts were precarious.

He says: “The market is distorted. If we were to use yield as our primary target, we would put both our own growth in distribution under some threat, and we would be taking on far too much risk for our clients.

“Nor do we use alternative strategies, such as derivatives or stock lending, which would drastically change the risk profile of the fund.

Around £19bn of income funds currently sit in the UK All Companies sector, after being thrown out of the UK Equity Income sector for not following the requirement rules, according to Hargreaves Lansdown.

Before Rathbone, Mark Barnett of Invesco Perpetual and Kevin Murphy and Nick Kirrage of Schroders have been banished to the UK All Companies sector, along with a number of other managers.

Hargreaves Lansdown senior analyst Laith Khalaf, who says the IA’s consultation on the issue does not go far enough, says the Rathbone Income fund is one of the best funds in the sectors and it will remain in the group’s Wealth 150 Plus list.

He says: “Any solution needs to make sure it doesn’t impose any additional burden on investors when choosing funds, and should also ensure investors are getting a healthy income premium to the market over the long term.”