At Square Mile we take time to ensure that we have clear and measurable performance objectives for all funds that we review. These vary depending on what outcome is being sought but clearly for equity income funds it is yield, distribution consistency, dividend growth and capital accumulation that are the important considerations. However, satisfying all of these areas all of the time is not easy and this has meant that within the sector there are a range of different approaches that emphasise different objectives. Therefore, we are not particularly concerned as to which sector a fund falls into, as long as it is meeting, or we believe that it can meet, its longer-term performance objectives. An obvious point of contention nonetheless, can be funds that are highlighted, and potentially marketed, as one thing, but in practice managed to a different set of objectives. As such, time must be taken to evaluate and understand each fund on its own merits.
Nevertheless, regarding these changes specifically we would perhaps question whether just meeting the market yield (albeit with the 90% annual limit) makes enough of a distinction between funds that are managed on a true income basis and those to a capital and/or total return outcome. This is especially pertinent in a world where the industry should arguably be, now more than ever, trying to highlight the particular merits of active investing over passive.
We understand that this has been a tough call for the IA to make, especially as they were undoubtedly bombarded with a range of different opinions on the matter. However, whilst we appreciate that they have settled on a decision that will satisfy many fund groups, we would stress that there is now an opportunity to encourage fund managers to clearly quantify what they are looking to achieve. This should be articulated in a well-defined manner that non-investment professionals can comprehend and use to help them make their investment choices, with peer group comparisons being discouraged.
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