Mumbai: Dividend yield funds, considered safe haven against stock market volatility, have failed to cushion investors against the impact of corrections in the past one year and have consequently lost assets, fund managers said.
Their performance may now improve, given that easing prices have brought more shares into high-dividend yields, valuations have softened and last year’s redemption pressure has reduced, they said. “It has not worked in the 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 past 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.
“You had more redemption which caused stocks to completely underperform,” said Prateek Agrawal, head of equities at ABN Amro Asset Management (India) Ltd said.
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 4.81-17.94% range in the year ended 9 April 2007, against an average 2.44% rise in diversified equity funds.
The assets under management of India’s six dividend funds dropped to Rs1,260 crore at the end of March from Rs2,019 crore 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 past 12 months, said.
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 the year ended 9 April 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.