Income funds face IMA sector ejection

17 Dec 2012 | 07:45
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A number of high profile UK equity income funds are at risk of being ejected from the Investment Management Association (IMA)’s UK Equity Income peer group next July, when a long-running review of the sector ends.

Funds must have achieved the IMA’s basic yield target of 110% of the FTSE All Share yield over a three-year rolling period to remain in the UK Equity Income sector.

They must also run an income level of at least 90% of the FTSE All Share yield, on an annual basis, to keep their place in the sector. 

A number of funds’ positions are under threat as they have produced sub-par yields over the past two years.

High-profile funds

The St James’s Place Equity Income trust, headed by RWC’s Nick Purves, as well as the £343m Henderson UK Equity Income fund, run by James Henderson, are two well-known funds which have not met the basic three-year yield requirement over the last two years, according to IMA figures obtained by Investment Week.

Unless the managers can drastically enhance their funds’ yields before their year ends, both funds will be removed from the sector.

Other portfolios that have so far undershot the target are the £277m JPM UK Higher Income and £132m JPM UK Strategic Equity Income funds, the £2.8bn HBOS UK Equity Income fund, and the £10m CF JM Finn UK fund.

“To ensure compliance with the intended 110% yield, funds in the sector will be tested over three-year rolling periods by taking a simple average of the yield figure achieved for each fund at its year end,” said a spokesperson for the IMA.

“As an illustration, this would require a fund that delivered 90% in the first year and 100% in the second year to deliver a yield of 140% in the third year, if it were to be allowed to remain in the sector.”

Challenges ahead

James Bowers, head of product at Henderson Global Investors, admitted the yield target presents a challenge and said the fund may have to sacrifice some of its outperformance to remain in the sector.

Henderson UK Equity Income has returned 49% over the last three years, beating the IMA UK Equity Income sector average of 26.3%, according to Morningstar.

“We want to remain in the sector, but the issue we face is that the fund is going to have to trade out of some of the manager’s favoured holdings and buy higher yielding equities, which do not possess the same quality characteristics our current holdings have,” said Bowers.

“The rule is going to prove a challenge for the better performing funds in the sector.”

However, Chris Ralph, chief investment officer at St James’s Place, said the group will not sacrifice returns to boost its Equity Income trust’s yield, and is prepared to exit the sector if the yield falls below the IMA’s threshold.

“We understand where the IMA is coming from, but we are keen to focus on the fund’s total return. If we implemented a specific income discipline, it would ultimately have a negative impact on clients,” said Ralph.

The St James’s Place Equity Income trust has returned 18.1% over the last three years.


The IMA’s review was instigated in July 2010 following complaints from members that a number of funds were failing to achieve the basic yield target, instead opting to increase their overall return by running higher exposure to growth-orientated stocks.

Robin Geffen, CEO of Neptune Investment Management, is one industry figure who supports the review. He predicts there will be casualties when the review is completed.

“The IMA promised three years ago it would review the income fund sector for the final time, and personally I think the funds should be yielding at least 10% above the FTSE All Share,” said Geffen.  

“When the performance tables are finally recalculated next year, there will be relegations, some promotions, and some fund managers thrown to the wolves for not meeting the yield requirement.”

Time horizon

Not everyone has welcomed the IMA’s approach. Paul Surguy, head of managed funds at Sanlam Private Investments and author of Principal Investment Management’s White List study of income funds, argued the IMA should look at income generated over five years as opposed to three.

He said a longer time horizon would allow shorter-term issues to wash out, such as major UK income stock BP cancelling its dividend for nine months.

“We believe what investors want from equity income funds is not solely a high income, rather, a growing level of income that is balanced with the opportunity for some capital growth over the medium term,” he added.


Affected funds

2010 - 2011

Fund name  Fund year end date  110% of the FTSE All Share (%)  Fund year end yield 
St James's Place Equity In trust  30/09/2010  3.5  3.1
Henderson UK Equity Inc fund  30/06/2011  3.3  3.2
JPM UK Higher Income fund  31/01/2011  3.2  3
JPM UK Strategic Equity Inc fund  31/01/2011  3.2  2.8
HBOS UK Equity Income fund  31/01/2011  3.2  3.3
CF JM Finn UK Portfolio fund  30/06/2011  3.3  2.9


Fund name  Fund year end date  110% of the FTSE All Share (%)  Fund year end yield 
St James's Place Equity In trust  30/09/2011  4  4.1
Henderson UK Equity Inc fund  30/06/2012  4.1  3.6
JPM UK Higher Income fund  31/01/2012  3.7  3.5
JPM UK Strategic Equity Inc fund  31/01/2012  3.7  3.5
HBOS UK Equity Income fund  31/01/2012  3.7  3.5
CF JM Finn UK Portfolio fund  30/06/2012  4.1  3.6


Categories: EquitiesInvestment

Topics: The investment management association

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