Modified rules aim to simplify yield calculations

The Investment Management Association (IMA) has changed the requirements for funds in its UK Equity Income and UK Equity & Bond sectors. The modified criteria aim to simplify the calculation of yields in both sectors and allow a fairer comparison of fund performance by investors.

For inclusion in the UK Equity Income sector, the IMA now requires funds to “invest at least 80% in UK equities and [aim] to achieve a yield on the distributable income in excess of 110% of the FTSE All-Share yield”. Under the previous definition, funds were asked to target “a yield on the underlying portfolio”.

The change increases the emphasis on dividend yield, which will be calculated by managers at the end of each month.

Funds will have 12 months to hit the 110% target, but those that fail to achieve this will be scrutinised and may be removed from the sector.

The move follows concerns that several funds in the UK Equity Income sector, which is worth £54 billion, are failing to generate the required yield.

Tineke Frikkee, manager of Newton’s £3.4 billion Higher Income portfolio, says funds will no longer be able to “fudge” their numbers.

“Historically there has been a real problem getting correct yield data – the new calculation is simpler and higher quality,” says Frikkee. “Funds want to be associated with UK Equity Income because the reputation of the sector is great. But last year it underperformed and some funds have bought lower-yielding stocks because they were in favour.”

Morningstar has also announced that it will start calculating its own yield data towards the end of the first quarter. The firm at present relies on data supplied by fund managers.