Article last updated 30 September 2025.
The reforms
You may also have read a note issued by the IA on 9 March and some resultant press coverage announcing some reforms to the latter and some further reviews to take place over the coming months.
For now, from 3 April 2017, for a fund to be included, the yield tests for the UK Equity Income sector will require fund yields to exceed the FTSE All-share index yield over 3 year rolling periods and 90% over 1 year. This changes from the current 110% yield hurdle over 3 year rolling periods. Failing funds will be removed based on the new parameters and funds outside of the current sector may elect to be reclassified if they can demonstrate compliance with the new yield hurdles.
In recognition of the impact of the ‘denominator effect’ (strong price return growth) in yield calculations, an IA working group will be set up to review the yield guidelines. The project scope is also intended to examine improvement of disclosure of income information.
Firstly, we have elected to return to the sector and secondly have offered our time and resource to be part of the working group – this to help shape the instigation of deeper, client-focused, relevant, robust and meaningful guidelines for these extremely important and popular funds.
What do we believe a UK Equity Income fund should deliver?
At Rathbones we aim to provide a real increase in distribution year-on-year, giving unit-holders an ‘annual pay rise’, if you will. This is achieved by investing in businesses that are best placed to grow organically their dividends, through internally generated cash flow. Over the years, the yield on a fund will be only a function of this process, rather than a specific aim.
The UK Equity Income sector contains a broad church of funds, which is of course a great benefit to clients’ choice and it is important that the sector is completed with all available funds of this type. Some funds simply seek to drive a high level of income; some seek to deliver a sustainable level of income with lower, but still reasonable starting yields and then seeking to drive a rising income stream over the medium to long term. Typically, the latter will seek, through a combination of capital and income growth to deliver good total returns.
The rules and further developments
So what we believe is required is a broad set of rules that are easy for clients to understand that still allow each fund to have a very specific and defined set of aims and objectives. Of course dividend yield is important, and if a yield measure is used, reducing it to 100% of the market yield does at least give us a more sensible starting point.
We welcome the creation of a working group to further review the yield guidelines. A deeper definition is required that considers a number of factors when determining the quality of an equity income fund, much in the same way as the SANLAM half-yearly White List considers yield, total return performance over a number of years and long-term income record. It strives to highlight those funds with a track record in delivering a rising level of income, alongside long-term capital growth.
Clients should be able to assess the value of income over time and its stability and volatility and the pence per unit distribution, which should hopefully show the ‘pay rise’ mentioned earlier. We welcome the review of the NAV used, not only at the end of the period but at the beginning and throughout the period, particularly because of the ‘denominator effect’ which of course penalises a strong performing fund in terms of current yield.