Kames’ Equity Income duo question need for changes to sector

Kames Capital’s UK Equity Income co-managers Douglas Scott and Iain Wells have questioned the Investment Association’s recent changes to their sector, suggesting it makes no sense and will potentially cause confusion to the wider market.
The duo have dubbed the changes as doing the ‘IA Hokey Cokey’ with some of those previously excluded for breaching sector guidelines now allowed back in as the yield requirements have been lowered so much, as to make the sector redundant.
The IA announced in March 2017 that it was lowering the UK Equity Income sector’s yield hurdle from 110% to 100% of index yield over a three year rolling period – and that failure to achieve 90% of the index yield in any one year would result in expulsion from the sector.
This move has caused Scott and Wells to question how a fund in this sector can actually still be deemed an income fund as it is now just the equivalent of any UK Equity Fund.
Wells says: “A UK Equity Income fund should offer a premium yield relative to the market, otherwise is it not just a UK Equity Fund? It makes no sense to lower the hurdle to being classed as an income fund, and means that such a fund now only needs to yield as much as the market, which is a confusing message to send the wider public.
“The skew in the All Share Index, and the challenge it creates for income fund managers is well known.  But as demonstrated by the Kames UK Equity Income Fund, it is possible to offer performance and a premium income.  Lowering the hurdle to the 100% level arguably has more to do with accommodating bigger groups that have been unable to meet the previous 110% requirement.  Lowering the grade, whether in classification of funds, or in other areas like exams, is a backward move in the long run.”
Scott says: “This move is good news for some in the IA Hokey Cokey UK Equity Income Fund sector. Some that were ‘out’ can now be ‘in’, which basically implies if you’re big and don’t like the game, ask for the rules to be changed!
“Since the launch of the Kames UK Equity Income Fund in 2009, its’ yield has averaged 21% above that of All Share* and the fund has been amongst the top for performance in the last three years. An initial investor last year received an income of 7.2% on their initial investment*. We are ‘in’ but must now welcome some supposed income focused funds to ‘shake it all about!’ ”