Fund Focus

Tactical Asset Allocator: Is this a sign markets are about to topple?

Tactical Asset Allocator: Is this a sign markets are about to topple?

Is this exchange traded fund (ETF) launch a sign that financial markets are ripe for a fall? Ceri Jones investigates.

Investment trust bargain hunter: Dividend hero slips to 10% discount

Investment trust bargain hunter: Dividend hero slips to 10% discount

Our latest tip has a FTSE 100-beating yield of 4.2% and a 43-year track record of dividend growth. Kyle Caldwell unveils the last trust bargain.

Trusts with a war chest of cash can weather stockmarket storms

Trusts with a war chest of cash can weather stockmarket storms

With the formal countdown to Brexit underway, Andrew Pitts finds the star trusts best placed to fund their current dividends and hopefully to grow them as well.

Why changes to the equity income fund sector rules could hit investors hard

Why changes to the equity income fund sector rules could hit investors hard
Reducing the yield target for the IA's key UK equity income sector may mean overall yields will fall, says Franklin Templeton's Colin Morton.
In March, the Investment Association (IA) announced that from last week, it would be lowering its UK equity income sector yield hurdle from 110 to 100 % over a three-year rolling period.
As a UK equity income manager, I have to say I'm somewhat surprised by the decision. In the context of a sector named 'income', it seems counterintuitive that there is no longer a requirement for funds to yield more than the market, especially given that under the new rules, a FTSE 100 tracker fund - which has not been designed for income - could technically now be classified as part of the sector.   
We don't yet know what the long-term impacts of the change will be, and whether these will prove to be helpful; however, there are certain repercussions that I foresee.   
More choice but more confusion
Over the last few years, a lot of funds have been forced to exit the sector as they have struggled to meet the 110 % yield target. However, now that the yield target has been lowered, we will likely see these funds re-applying for entry, alongside a whole list of new players coming into the market. While this will give income investors more choice, it will arguably lead to a more diluted offering.
We believe this has the potential to be confusing for investors, who may find that their income expectations are no longer being met. With the previous target, it was clear that all funds in the sector needed to yield at least 10 % more than the market over three years - helpful for people seeking income especially those in retirement.
There will now be a much wider range of yields, with some funds yielding as low as 90 %. In my view, the income sector will no longer do what it says on the tin.
An overall fall in yield
I fully appreciate that reaching the 110 % yield target has sometimes proved to be very difficult, especially in the current environment, with only a handful of companies such as Shell, BP, HSBC and Vodafone producing the majority of the yield.
However, there are ways for investors to make up the yield if they don't want to be overweight in these companies. For example, managers could look to invest in these stocks, but keep their positions underweight and then top up the dividend with high-yielding stocks such as those in the utilities and pharmaceuticals sectors. 
Of course, the new rules will give managers more flexibility to run their funds in a different way and invest in a broader range of stocks and sectors. Whether this move will prove to be good or bad for long-term performance remains to be seen.
What we do know is that historically the equity income sector, as defined by the 110 % rule, has performed well. That is likely because there has been pressure to maintain a higher yield, so managers have stayed disciplined to buying into stocks that are less 'in vogue' and yielding more than the market, and then selling them when the yield drops.
Going forward, fund managers won't have to do that. They will be able to run stocks for longer, with less concern for yield fluctuations, and will not need to buy the higher-yielding stocks to stay in the sector.
As this pressure is taken away, managers could find that they are not yielding as much anymore, and worryingly, the likelihood is that the yield of the sector overall will fall.
We will also no longer be comparing like with like, as funds will have a variety of objectives and can allocate a higher proportion of their portfolios away from yield-producing stocks.
Growing the dividend
The long-term impacts on income sector performance (be they positive or negative) will not be realised for some time, but with regards to how we run our own fund, the IA reclassification will have little impact.
Our strategy will remain the same and we will continue to focus on growing the dividend yield year-on-year, with the 110 % target still very much front of mind, an important element that we are very proud of when we look at the track record since the inception of our fund.
As the saying goes: 'If it's not broke, why fix it?'
Colin Morton is portfolio manager of the Franklin UK Equity Income fund.

Reducing the yield target for the IA's key UK equity income sector may mean overall yields will fall, says Franklin Templeton's Colin Morton.

11 investment trusts with dividend yields of over 4%

11 investment trusts with a dividend yield of over 4%

Investors who are prepared to take some risk in return for potential income may want to consider these trusts. Marina Gerner investigates.

Top 10 most popular investment trusts - March 2017

Top 10 most popular investment trusts - March 2017

There are two new entries in this month's most-popular investment trusts list. Josh Lee has all the details.

Top 10 most popular investment funds - March 2017

 Top 10 most popular investment funds - March 2017
March's most-bought investment funds reveals where investors have been channelling their money over the month. Marina Gerner takes a look.

March's most-bought investment funds reveal where investors have been channelling their money over the month. Marina Gerner reveals all.

US funds: How to find an active fund worth its salt

 US funds: How to find an active fund worth its salt
The US stock market has soared and tracker funds have flourished as Donald Trump-spurred optimism has taken hold. But will the elation last? Holly Black investigates.

The US stockmarket has soared and tracker funds have flourished as Donald Trump-spurred optimism has taken hold. But will the elation last? Holly Black investigates.

The most popular stocks of 2017 so far

The most popular stocks of 2017 so far

David Brenchley names the most-traded stocks in the FTSE 100, FTSE 250 and AIM in the first quarter of 2017, and the most-popular funds.

Turbocharge your ISA with these smaller company investment trusts

Turbocharge your ISA with these smaller company investment trusts

Investors have been shunning the smaller companies sector, but its vibrancy and demonstrable value are beginning to attract their attention, writes Fiona Hamilton.

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