The Hindu Business Line : Dividend yield funds end up as poor performers

If there is one strategy that has in recent times failed to warm the cockles of investors' hearts, it is dividend yield. Dividend yield funds have ended 2006 as among the year's poorest performers.

In fact, four out of the 10 worst performers are funds that have dividend yield as their underlying theme.

While ABN Amro MF's dividend yield fund has actually turned in a negative show, considering its one-year performance as on December 29, those managed by Principal MF, ING Vysya MF and Birla MF have provided 5-13 per cent returns during the period.

This is when the average diversified fund has given well over 35 per cent.

Similar products managed by UTI MF and Tata MF have done somewhat better, delivering roughly 22 per cent and 16 per cent respectively on the same date.

The latest return statistics belie the general feel-good sentiment that had surrounded the launch of some of these funds, investment circles say, adding that the principle of dividend yield has largely failed to meet expectations.

The situation becomes more obvious when even a typical broad-based fund (with no special theme to speak of) is seen against the best-performing dividend yield product, they mention.

Large funds

Curiously, as DBS Cholamandalam Distribution has found out, the larger funds in the dividend yield category probably managed themselves better. This is despite the fact that their portfolios "looked very common most of the time and were mostly large-cap oriented".

Funds managed by both Birla MF and Tata MF seemed to have done considerable stock-picking across sectors. The smaller ones, more concentrated in a few stocks, were subject to higher volatility.

Tata Dividend Yield Fund, incidentally, was actually on a road less travelled: It followed a somewhat different stock-picking strategy, marked by certain stocks that few of its peers had.

The distribution company, which says it has been negative on dividend yield funds for the last two years and is still sticking to this policy, points out that the fund houses concerned were able to garner a substantial sums through these products. The latter manage over Rs 1,500 crore.

Fund houses, on their part, defend their products, with most suggesting that these are somewhat unadventurous in nature.

For instance, UTI MF, which had Rs 520 crore under management in end-November, points out that its dividend yield fund is "conservatively managed", suited for investors with "medium to low-risk profile and with a long-term investment horizon".

More dividend seekers

Assets managed under dividend options of dividend yield funds stand far higher than that managed under growth, a trend that perhaps underscores the typical investor's desire to take home tax-free payments, it is felt.

The tally, according to DBS Chola, is "substantially higher than the ratio for the average diversified equity fund - which is closer to 55-60 per cent for even the largest of funds in the country".

The distributor has also wondered whether this situation is a result of a certain degree of mis-selling by a section of distributors - the latter may have even positioned dividend yield funds as a "regular dividend" deal before gullible investors.

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