The Investment Association (IA) is to reconsider one of the more problematic requirements of its UK Equity Income sector after too many funds were found to be failing to meet the mark.
The IA is running a consultation into its yield rules, which currently require funds to achieve an average yield of no less than 10 per cent above the FTSE All Share yield over the course of three years, and will be seeking the views of asset managers over the next four weeks.
According to the Financial Time's Investment Adviser, which revealed today that it had seen a copy of the consultation document, the trade body is aware that the current yield requirement has created some "controversy" in the sector and is now looking for a more "transparent" method of monitoring fund performance.
The consultation document reads: "Transparency could be part of the solution. The presentation of funds' income delivery is important and improving that could be an option."
Read more: Asset managers told to watch their language
According to Hargreaves Lansdown, some £19bn of income funds are now sat in the UK All Companies sector after failing to meet the yield requirement. Big name funds that have been kicked out include Invesco Perpetual’s income range, the Schroder Income fund and the Jupiter Responsible Income fund.
"The current UK Equity Income rules reward failure and punish success," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
"They lead to the absurd situation where an income manager can get kicked out of the sector because they have done a good job in growing investors’ capital. It’s high time the UK Equity Income sector definition was reviewed to stop good funds being expelled from the sector on a technicality."
Hargreaves Lansdown described the current set of requirements as "untenable" and proposes instead that yield be calculated on the income produced on the amount invested at the start of the period, which would balance the need to deliver returns to investors with the need to grow the fund for the long term.
Khalaf added: "The key to creating a rising dividend stream for investors is building capital, yet managers are being penalised for taking this long term approach. We believe the best solution for the sector is to calculate a fund's yield based on its price at the start of the year, not at the end. That way managers are not hobbling themselves by boosting the fund's capital over the year."