Troy Asset Management's Trojan Income has become the first fund to be spared ejection from the Investment Association (IA) UK Equity Income sector due to the Covid-related suspension of yield requirements, Investment Week understands.
The decision comes despite Trojan's year-end date being before the IA's previously self-imposed deadline.
At its 31 January year-end, the £3.5bn Trojan Income fund yielded 3.7%; 90% of the FTSE All-Share's yield, one of two criteria sector funds must satisfy, at that same date was 3.8%.
When the IA announced the suspension of yield requirements for the UK Equity Income and Global Equity Income sectors, the trade body said it would apply to all funds with a year-end date after 28 February.
However, Investment Week has learned Trojan Income still resides in the UK Equity Income sector.
A spokesperson for the IA told Investment Week the suspension of its requirements was "introduced to prevent short-term disruption to these sectors, making it harder for customers to identify equity income funds".
"The IA is committed to providing full transparency while taking a pragmatic approach to monitoring and will continue to keep the sector tests under review," the spokesperson added.
TAML declined to comment.
'The right decision'
Adrian Lowcock, head of personal investing at Willis Owen, said the IA was "probably giving the sector a lot of leeway, as it has been one of the worst hit during the crisis". "Indeed, there is little benefit for investors for the IA to remove one fund because of an arbitrary line in the sand," he continued.
The IA was correct to "relax their criteria" for the UK Equity Income sector, said Simon Molica, active portfolio fund manager at AJ Bell. He reasoned that the 12-month yield on the FTSE All-Share had "temporarily spiked due to market falls in share price not because of income growth", highlighting "the challenges of using yield alone".
Head of research at Square Mile Investment Consulting and Research John Monaghan agreed it was "the right decision, as providing income is one of the key objectives of this strategy". Monaghan noted that until its 2019 financial year, Trojan had grown its annual distribution to unitholders every year since launch in 2004 - the longest record of any fund in the sector.
However, the managers had spent the past 12 months trimmed some of the portfolio's higher yielding stocks on valuation grounds and replaced them with lower yielders that have better dividend growth prospects - a "sensible strategy", according to Monaghan.
He explained: "The subtle switch into companies that can compound cash flows and grow dividends over the long term should help preserve capital at a portfolio level, which aligns to the managers' want to not put capital at risk in their pursuit of income."
The fund is rated AA within Square Mile's Academy of Funds.