The Investment Association (IA) has suspended the yield requirements for both its UK equity income and global equity income sectors due to the dividend cuts, cancellations and deferments from companies caused by the coronavirus crisis.
IA rules currently require funds in their equity income sectors to achieve an historic yield on the distributable income in excess of 100% of the UK-focused FTSE All-Share or global-focused MSCI World at each fund's year-end on a three-year rolling basis, and 90% on an annual basis.
Funds not meeting these requirements are usually thrown out of the sectors, with a number of historic examples having already been dumped.
With so many companies unable to trade because of the lockdown, and many not even reporting results - let alone dividends - scrapping this requirement will at least remove an unnecessary hurdle for fund managers.”
Jonathan Lipkin, director of policy, strategy and research at the IA said the measures would "continue to provide savers with transparency on fund performance, while helping prevent short-term disruption to the equity income sectors, which are particularly affected by the economic consequences of covid-19".
However, dividend payments are currently under pressure as listed companies around the world struggle with covid-19-related lockdown scenarios, with some funds likely to become unable to meet the requirements to be included in the two sectors.
As a result, the trade body has said it will suspend these requirements for the next year in order to prevent any short-term disruptions to these sectors.
The IA said the enforcement of the 90% yield threshold test will be suspended for all funds with a year-end after the end of February 2020 for 12 months. Any fund currently in the sectors that does not meet this yield test will not not be automatically removed.
'A sensible move'
Industry reaction was predominantly in favour. Colin Morton, manager of the Franklin UK Equity Income Fund and Franklin UK Rising Dividends Fund, said: "Companies are facing truly unprecedented circumstances amid the covid-19 pandemic, with many businesses being forced to close down as a result of very strict government containment measures around the world.
"This exogenous crisis is understandably taking a toll on dividend policies and the IA's decision to suspend equity income yield requirements for 12 months seems a sensible approach given the current environment."Adrian Lowcock, head of personal investing at Willis Owen, an investment platform in the UK, called the IA's decision "a sensible move."
"With so many companies unable to trade because of the lockdown, and many not even reporting results - let alone dividends - scrapping this requirement will at least remove an unnecessary hurdle for fund managers."
"It will take the pressure off fund managers to try and maintain dividends in what are extreme conditions, help protect investors as fund managers will not have to chase income by clustering into a minute number of companies who are still able to pay dividends, or take extra risk in chasing yields.
"The only worry," Lowcock said, "is whether a 12-month suspension turns out to be long enough, but the IA can always revisit this down the line if needs be."