Analysis: New IMA sector branded unnecessary

Advisers have branded the introduction of the UK Equity Income and Growth sector “a lot of nonsense” and “totally unnecessary”. They say it will not affect how they assess income funds.

Last week the Investment Management Association unveiled the list of 17 funds in the sector, which will have a lower yield target of 90% of the FTSE All Share. The target is 110% for funds in the UK Equity Income sector.

The move follows almost 18 months of speculation on the future of the UK Equity Income sector, as many have complained about some funds chasing performance tables rather than focusing on yield.

The IMA released its proposals for the new sector at the end of 2008, inviting members to give feedback.

After the unveiling of the sector, a statement said: “IMA removed from the UK Equity Income sector all funds within the sector that failed the yield test based on 12 months’ look-back on December 31, 2008, but taking into account final distributions if these were out of step with a fund’s calendar year end. Most of these funds chose to transfer to the new sector, permitting the retention of track records.”

Meera Patel, the senior analyst at Hargreaves Lansdown, says that the Equity Income and Growth sector is “totally unnecessary”. She feels the IMA has bowed to the demands of jealous fund managers in the sector.

“The IMA has been bullied by others in the peer group, and I do have sympathy with them. In this situation it has not been the best outcome.”

She also points out that as yields plummet, funds could move sectors quite regularly, highlighting again that the launch of this sector has been untimely.

Another adviser, Darius McDermott, the managing director at Chelsea Financial Services, says “there could not be a worse time to do it”. He accuses other fund managers in the UK Equity Income sector of trying to take a slice of Neil Woodford’s sales.

Woodford runs the Invesco Perpetual Income and High Income funds, amounting to £13.5 billion in assets under management, which were the first to announce their intention to switch sectors. He was one of those criticised over the past two years for failing to meet the 110% yield target, but has consistently beat the peer group average in terms of performance.

Patel says: “Woodford has delivered a yield that is not as high as the peer group, but he has made it clear he focuses on capital growth. Compounded over the long term, his returns have been far superior to the market.”

McDermott adds: “This has been driven by some people who have achieved the yield target that are annoyed with those that have not achieved it. They are trying to get Woodford’s money, as they are hacked off he is still seeing inflows and not achieving the yield. It will make little difference to Woodford’s funds and how we look at income vehicles.”

Earlier this year, Invesco Perpetual said it would transfer the funds rather than sacrifice a long-term balance between income and capital to achieve short-term yield.

Other commentators surveyed by Fund Strategy were not as negative about the changes, but say they will have little impact on how they assess funds.

John Husselbee, a funds of funds manager at North Investment Partnership, says that clarity over the sectors is welcome, as they are set up for the man on the street rather than professional investors. However, he wonders whether the sector will disappear in five years’ time as the yield question vanishes.

Simon Bullock, the client director at Truestone Asset Management, says he is generally in favour of the sector changes, but they will have little impact on his fund selection, as he looks at British equity funds collectively. He adds that, at 17 funds, the sector is quite small.

Jason Britton, the chief executive officer at T. Bailey, the funds of funds boutique, has been calling for the IMA to take action over yield offenders in the UK Equity Income sector for some time. However, he says he does not think the new sector has been the right move.

“Our belief has long been that funds that consistently missed the UK Equity Income Sector yield targets weren’t really trying, so moving into an Income and Growth Sector where they claim to have an income focus, but can actually deliver less than the average yield of the FTSE All-Share, in our view is misleading to investors.”

The IMA will review both sectors and their definitions in 12 months’ time.

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