Rathbone Income kicked out of UK equity income sector

Money Observer Rated Fund Rathbone Income has been removed from the Investment Association's (IA's) UK equity income sector, having fallen short of the sector's 110% yield rule. The fund will move into the UK all companies sector in May.

The news comes a day after it was revealed that the controversial yield requirements for inclusion in the sector are to be overhauled - and has frustrated the fund's manager Carl Stick.

Current rules require funds to be invested at least 80% in UK equities and to achieve a yield in excess of 110% of the FTSE All-Share index yield at the fund's year end. It is argued, though, that this means managers who grow the capital of their fund, thereby potentially reducing the yield, can be penalised.

Rathbone Income's historical distribution yield is 3.65% on its income share class. This falls short even of the FTSE All-Share's yield of 3.77%; 110% of the All-Share yield would be 4.15%.

In a letter to shareholders, Stick insists he will not change the fund's process or focus, saying the fund "is an income fund, irrespective of the sector to which it is assigned".

He adds: "Of course dividend yield is important, but more important is the ability to grow that dividend, as it is from this growth that total returns are maximised. This remains our mantra.

"As we are all well aware, the current yield offered by the FTSE All-Share is distorted by the dividends paid by a number of mega caps, yet we understand that many of these payouts are precarious.

"The market is distorted. If we were to use yield as our primary target, we would put our own growth in distribution under some threat, and we would be taking on far too much risk for our clients."

On Monday, the IA confirmed it will re-think the requirements for inclusion in its UK equity income sector, proposing three solutions: to maintain the current definition; lower the bar and require funds to produce more income than the FTSE All-Share; or require funds to produce more in-depth income statistics.

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