The Investment Association (IA) has removed the Rathbone Income fund from the UK Equity Income sector for having fallen short of the 110% yield rule.
The IA requires funds in the UK equity sector to yield 10% over the FTSE All-Share over a three-year period. The fund managed by A-rated Carl Stick (pictured) will move into the UK all companies sector in May.
In a letter to clients, Stick said: ‘It is frustrating, but perhaps unsurprising to report that the Rathbone Income fund, having fallen short of the 110% yield rule, is to move from the UK Equity Income sector. The Investment Association (IA) is consulting with its members on a major and necessary reform of the sector definition, which we wholly support.’
Mike Webb, chief executive officer, Rathbones Unit Trust Management, said: ‘It is obviously frustrating for us but we understand that the IA has to apply the current rules, as that would be a little unfair to the other income funds that have been ejected from the sector.
‘What we are grateful for is that they have listened to the industry and are now undertaking a review of the sector classification and we think that is extremely important.’
In a consultation document published yesterday, the IA acknowledged there is controversy over the 110% yield rule in the UK Equity Income sector, which has seen a number of high profile funds leave the sector.
‘Another fund bites the dust from the UK Equity Income sector, in a timely demonstration of why the rules need to be reformed,' Laith Khalaf, senior analyst, Hargreaves Lansdown,
‘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,’ Khalaf said.
Stick pointed to the dividends paid by a number of mega-caps as distorting the current yield offered by the FTSE All-Share.
‘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,’ Stick said.
The £1.18 billion fund has returned 28.3% over the last three years to the end of March, against a peer group average of 22.1% during the same period.