Nishant Kumar, Reuters
Mumbai: Dividend yield funds, considered a safe haven against stock market volatility, have failed to cushion investors against the impact of corrections in the last one year and have consequently lost assets, fund managers said.
However, their performance may now improve given that easing prices have brought more shares into the universe of high dividend yields, valuations have softened and last year’s redemption pressure has reduced, they said.
“It has not worked in past one year but seems to be working now,” said Swati Kulkarni, who manages UTI Asset Management Co.’s dividend yield fund — the country’s largest such scheme and the only one to yield positive returns in the last one year.
Widespread bullish hopes in 2006 made many investors fancy sky-high returns from growth stocks and pull out of their safer bets in dividend yield funds. This led to forced selling of illiquid stocks by fund houses to pay such investors off.
“Then you had more redemption which caused stocks to completely underperform,” Prateek Agrawal, head of equities at ABN AMRO Asset Management (India) told Reuters. “To my mind, that is the single biggest issue.”
On the other hand, subsequent corrections pulled down the net asset values of dividend funds more sharply than even diversified equity funds, letting down faithful investors who had hoped for at least some capital protection in a falling market.
Five of six such funds, not counting the UTI scheme, saw their net asset values dip in the range of 4.81% to 7.94% in the year to 9 April 2007, as against an average 2.44% rise in diversified equity funds.
The assets under management of India’s six dividend funds dropped to Rs12.6 billion at the end of March from Rs20.19 billion a year back.
“I think that has been the sad story of practically all dividend yield funds,” Agrawal, whose dividend yield fund lost 86% of assets in the last 12 months, said.
Beaten more in bear market
The multi-year bull phase in India has seen dividend payouts shrinking as a proportion of market prices. For instance, the average dividend yield of the 50 shares in the NSE index fell to 1.20% from 3.18% in May 2003.
“That’s no longer a good protection,” Mahesh Patil, fund manager at Birla Sun Life Asset Management Co. said. “So we have seen some of these stocks actually getting beaten more in bear market, when ideally they should have not fallen much.”
Among the CNX 500 constituents, stocks with dividend yield in excess of 50-share NSE index’s average yield have fallen 18.81% in year to 9 April as compared to 6.6% rise in the broader index.
And the dilemma was that “stocks which have outperformed markets do not fit into the universe which is available for dividend yield funds,” Kulkarni of UTI said.
Many high dividend stocks were also from sectors lagging in growth rates, she said citing fast moving consumer goods, pharmaceuticals, oil and gas, metals and banks.
But the out-of-favour period had also left many high dividend stocks underowned and available at attractive valuations, Agrawal, whose asset management company has lowered the dividend threshold for its fund, said. “The ownership problem which was there is past may work in the favour of this strategy going forward,” he said.