The Rathbone Income Fund will move from the IA UK Equity Income sector to the IA UK All Companies sector on 1 May 2016.
Our view on the fund
The Rathbone Income Fund is one of the best UK income funds available, in our view. The change in sector does not denote a change in process and the fund will continue to be managed with the aim of providing a consistent and growing income. Carl Stick, the fund's manager, was unwilling to change the fund to boost the yield in the short term, a decision we view positively as this often has a detrimental impact on the fund's capital. We remain confident in Carl Stick's abilities and the fund will remain on the Wealth 150+ list of our favourite funds with low charges.
Comment from the manager
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 pay-outs are precarious. The market is distorted. If we were to use yield as our primary target, we would put both our own growth in distribution under some threat, and we would be taking on far too much risk for our clients. Nor do we use alternative strategies, such as derivatives or stock lending, which would drastically change the risk profile of the fund. 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.
Why has it been removed?
A fund's qualification for the UK Equity Income sector is based on the fund maintaining an average yield of 10% more than the FTSE All Share over a three year period. It also must not fall below 90% of the FTSE All Share yield over any twelve month period. This is currently calculated using a historic yield - taking the income produced during the year as a percentage of the price of the fund at the end of the year.
The Rathbone Income Fund has failed to meet this requirement and therefore no longer qualifies for inclusion to the sector. The manager has been a victim of his own success as the fund has achieved strong capital growth, which has had the effect of lowering the yield (see example below).
Fund A starts the year at a price of £1 per unit and ends the year at £1.10 per unit, producing an income of 5p over the year. The historic yield of the fund is therefore calculated as 4.55% (5p/110p).
Fund B starts the year at a price of £1 per unit and ends the year at £0.90 per unit, producing an income of 5p over the year. The historic yield of the fund is calculated as 5.56% (5p/90p).
Our view on the sector calculations
Calculating the yield based on the income produced for each £1 invested at the start of the period, as opposed to the end of the period would be a fairer measure of success, in our view. In the above example, both funds would be allocated a yield for the year of 5% (5p/100p), and therefore stand the same chance of staying in the sector based on the income they have produced. In this way, income funds which also provide good capital growth aren’t disadvantaged when it comes to staying in the sector. The Investment Association (IA) has launched a consultation on the qualification rules for the UK Equity Income sector to resolve the growing problem of funds being kicked out of the sector. We are working closely with the IA to ensure our clients' best interests are represented.
The value of investments, and any income from them, can fall as well as rise so you could get back less than you invest.