Risk fears as IA loosens UK sector yield target

Added 9th March 2017

Investors should ‘be wary’ fund managers do not take on riskier stocks after the Investment Association (IA) loosened the yield requirements for funds in the UK Equity Income sector.

Risk fears as IA loosens UK sector yield target

Gary Potter, co-head of the F&C Multi-Manager team, said the change would take the pressure off income managers but raised concerns that giving them “more rope” could lead to riskier stock-picking.

The IA announced the reduction in the yield hurdle for funds in the sector on Thursday, dropping the rate from 110% to 100% of index yield over a three-year rolling period from 3 April onwards.

Potter said: “If you take a big picture view obviously interest rates have come down so to keep a yield hurdle rate high does put a lot of pressure on managers to generate income.

“Equally the flip side is, particularly now with inflation starting to rise, this change may be when we are just at the bottom of the curve, it's almost too late.

“If you reduce the target for income requirements, you are giving them more rope to do stuff that might not be as financially strong.

“My concern would be to make sure that any reduction in the income threshold doesn’t provide more risk.” 

With the rolling three-year yield target now set at 100%, any fund failing to achieve 90% of index yield in just one year risks being removed from the sector.

 

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