Home to many of the industry’s biggest stars, it has seen sharp inflows on the back of the promise of a strong and steady income in an increasingly yield-starved world.
Recently, however, the sector's 110% yield requirement has become a point of focus as the number of managers that chose to be kicked out of the sector rather than chase what they termed ‘unsustainable yields’ to meet that requirement has risen.
Having earlier announced a consultation with the industry itself on the matter, which proved inconclusive, the Investment Association has now proposed a plan to consult with advisers and the public on how best to define the sector.
On the surface, the debate looks largely like one of semantics; the funds that have chosen to leave are merely in a different sector, their investment process remains the same and investors continue to invest in them. But, if one looks a little deeper, it can also be seen in a far more serious light. The sector is “at a cross road”, is how Association of Professional Fund Investors lead, Jon Beckett, characterised it, caught between adhering to existing yield limits and relaxing requirements and changing fund objectives.
‘Cross road’ is a good phrase to use because it implies a binary choice. And, implicit within the choice of how best to define the sector is a broader question that needs answering: Is the current level of income demanded of the sector realistic for the world in which we now live and in which we will have to invest going forward?
"such a scenario resembles little more than a house of cards made up of one least-worst choice on top of another."
Or, perhaps a better way to phrase the question is: can the sector continue to provide the yield it has done historically, while maintaining the level of risk to which investors in the sector have become accustomed?
If one looks at how much turnover there has been in the past six months within Sanlam Private Wealth’s white list of the top equity income performers, one could make the argument that the answer is no. The list remains populated with the same number of good quality performers, but the risk to investors of underperformance has arguably increased.