Outlook good as dividend growth to resume

FUND FOCUS/HIGH YIELD FUNDS:WITH DIVIDENDS out of favour as companies struggle to rehabilitate their balance sheets, high yield funds which typically invest in stocks offering dividends have suffered somewhat.

Ireland has seen its major banks cancel dividend payments and the trend has also been evident internationally, with oil giant BP becoming the latest to suspend all payments until 2011.

Nonetheless, the recent weakening of the euro vis-a-vis the dollar and sterling has provided a welcome boost for Irish investors in such funds.

According to Moneymate, in the year to June 23rd, Irish gross domestic high yield funds returned 6.45 per cent on average, or 27.09 per cent over the past 12 months.

The strongest performer so far this year is Aviva Ireland’s Geared High Yield Equity fund, which has returned almost 13 per cent, while its straight-forward high yield option is up by 8.12 per cent.

Other strong performers were Irish Life Bloxham High Yield Series Y fund (+8.67 per cent) and Bloxham’s High Yield Fund 3 G (+ 8.57 per cent).

Michael Gordon, executive manager of investments and funds at Aviva Ireland, says Aviva’s high yield fund looks for a value proposition in each stock it holds, with a dividend yield of 1.5 times the market average.

“We’re looking for large companies with sustainable earnings, mainly in defensive sectors,” he says.

The fund has an allocation of 46 per cent to the US market, 24.7 per cent to Europe, 20.2 per cent to the UK and 9.1 per cent to Asia. Its current top holding is McDonald’s, at 5.3 per cent.

While the geared option of the fund has posted a stronger return so far this year, Gordon points out that borrowed money adds to the volatility of the fund, making it riskier. Looking ahead, Gordon expects a resumption of dividend growth coming through on the back of stronger balance sheets.

“The outlook is quite positive for dividends,” he says.

Although Merrion’s High Yield Fund put in the best performance over the past 12 months, it has struggled so far in 2010 and is the worst performer year to date

It cites investors shunning the defensive characteristics of telecom and utility stocks in favour of more cyclical names, as factors in its underperformance.

Best performer YTD:

Aviva Ireland Geared High Yield Equity: +12.72 %

Worst performer YTD:

Merrion Stockbrokers High Yield Fund G: -2.29%