RLAM’s Cholwill: IA should reduce UK Equity Income yield target

Cholwill-Martin-RLAM-2014 620x430.jpgRoyal London Asset Management senior fund manager Martin Cholwill says the Investment Association should reduce the yield target for the UK Equity Income sector, to avoid forcing income managers into the same megacap companies.

The manager of the £1.61bn UK Equity Income fund says the number of dividend payers has fallen over recent years, meaning a high yield target forces income managers into the same megacap names.

The Investment Association is currently consulting the industry on whether it should change the criteria for the UK Equity Income sector, following a number of big name funds being kicked out of the sector for not meeting the minimum 110 per cent yield target over a three-year rolling period.

It is offering a number of potential alternatives, as well as keeping the current criteria. The other options are making it so funds only have to match the FTSE All Share’s yield or removing the target but requiring more statistics about the funds income and performance.

“The sheer availability of companies offering a premium yield has dropped. There is a clutch of megacaps that are not showing signs of cutting their dividends,” Cholwill says. “It is much more difficult to generate a 110 per cent yield on the market now than 10 to 15 years ago, when more companies offered dividends.”

He backs the option of funds having to just exceed the yield of the market, but says they should have to do so over one year, rather than a three-year rolling period.

While Cholwill has consistently met the Investment Association’s current 110 per cent yield target, he says the change is important for competition in the sector.

“You want a healthy sector, a diverse sector, and if a fund is working to an income strategy you want it in the universe. Making the change enables a lot more funds into the sector,” he says.

He adds that it also enables funds in the sector to pursue a number of different strategies, rather than being “boxed in” to a yield target.

The Investment Association is currently canvassing opinion from advisers and consumers on the sector review, after responses from asset managers showed a near 50-50 split between remaining with the current criteria and changing the rules.