When the income generated is so poor the fund fails to meet the qualifying rules laid down within the industry, according to the fund trade body.
The Investment Association claims UK income funds are suffering so much as FTSE100 companies slash dividends that the industry needs a rethink about what to call them.
Investors have found income funds attractive in a climate of low interest rates and have poured cash in rather than leave the money sitting in a bank.
To qualify for income fund status, a fund has to show 80% of managed assets are invested in UK equities and must return an average yield of at least 10% over the FTSA All Share index across 36 months.
FTSE dividends dry up
Falling revenues have led the trade body to revisit the definition as managers have struggled to meet the tests.
Now, the association wants to lower yield targets or scrap even scrap them.
In a letter sent to fund managers, the association has agreed to change the conditions for UK equity income funds, but told them that they should come clean with investors over the income they can expect the funds to generate.
Several of Britain’s biggest companies have cut dividends by up to half in 2016 – including mining companies Rio Tinto and BHP Billiton and engineering firm Rolls Royce.
As dividends dry up, more UK equity income funds have failed to qualify for the title.
Funds lose status
Since 2013, 17 funds have had to give up the UK equity income fund status, including some leading players, such as Schroders, Invesco Perpetual and Jupiter.
Another – the Rathbone income fund – is set to lose the status with a few days.
That leaves several funds with nearly £20 billion under management shifting from the UK equity income listing to the all-companies category.
The association suggests in future, equity income funds can either outperform the FTSE All Share yield or ditch yields and offer investors clearer information about the income the fund generates.
Another option would be to do nothing and see an empty UK equity income category as the remaining funds fail to meet the definition in time, says the consultation.
