Earlier this week the IA launched a consultation paper based on the premise that it may reduce or drop the 110% of the index yield requirement for classification as an equity income fund.
Bailey, co-manager on the Liontrust Macro Thematic team, questioned the wisdom of such a move in stark terms.
“Changing the rules for inclusion in the Investment Association’s UK Equity Income sector ex-post because of narrowing eligibility seems a little unedifying,” he said.
“All managers operate in the same market and likely enjoy equal measures of operational freedom, so we don’t necessarily subscribe to the argument that the market is at fault for missed yield objectives. The sector rule requires a live anchor and, for UK-focussed funds, it clearly needs to be the FTSE All Share dividend yield.”
The fund manager added that he considers the proposed criterion for inclusion based on stipulating premium-to-benchmark yield appears “arbitrary”, and he urged the IA to be clear in explaining how the new threshold will be arrived at and “probably more honest” in flagging the arbitrariness of any yield target.
Bailey also pointed out that there are already plenty options available for investors prioritising growth rather than dividend yield.
“Many investors in the sector will expect a high level of dividend return which hopefully grows at a rate over and above inflation,” Bailey said. “If these investors wanted a growth bias they would presumably have selected a fund from the IA’s UK All Companies sector.”