High yield funds not assured of paying dividends

FUND FOCUS:High Yield

Best performer over five years:Aviva High Yield +15%

Worst performer over five years:Merrion High Yield -36.5%

AT A TIME when dividend payments are not high on the agenda of many companies as they try to sustain their businesses, the attraction of high-yield funds – which typically invest in stocks offering dividends – is obvious.

According to MoneyMate, over the five years to January 4th, high yield funds delivered a return of -7.38 per cent, although it is important to note that the category includes a diversity of funds, such as geared funds and funds with specific regional focus.

The best performer according to MoneyMate is Aviva’s High Yield fund, which returned +15 per cent in the five years to the beginning of January. Set up in 2001, the fund is run from London and invests in about 40 large-cap global companies, including McDonald’s and Telefónica.

It also invests in less well- known companies such as US chip-maker Texas Instruments.

Michael Gordon, head of life and pensions marketing at Aviva Ireland, says one of the main reasons behind the fund’s strong performance is its use of financial screening criteria.

“We start with more than 4,000 stocks, which are screened and then brought down to several hundred. These are then subject to fundamental analysis. We look at the value proposition and the income stream of the proposition, as well as the usual multiples.”

The fund also specifically invests in companies which it believes are undervalued, meaning it will quickly exit an investment if it no longer fits this criteria.

Will high yield funds, traditionally favoured in a bear market, become less attractive as markets recover?

Not according to Gordon.

“The stocks with high dividend yields outperform in both bear and bull markets. For example, the Stoxx Euro 600, since 1992 to early 2010, has returned 324 per cent, 51 per cent of which has come from dividend.”

MoneyMate says Merrion’s High Yield Fund came in bottom of the pile over the period in question. It was originally a Merrion Capital fund which was taken over by Merrion Investment Managers (formerly Oppenheim Investment Managers) in April 2009.

According to Alex Kinsella, head of client service at Merrion Investment Managers, the fund, which invests in about 50 stocks across European and British markets, has returned 89 per cent since March 31st, 2009.

An exposure to financials earlier in the fund’s cycle may be behind its under-performance.