The M&G Dividend fund is to include a corporate bond element to help it reach its yield requirements...
The M&G Dividend fund is to include a corporate bond element to help it reach its yield requirements and still allow for investment in sectors such as technology, writes Robert Stock.
Fund manager Richard Plackett said the move is just part of the strategy being implemented across M&G's three retail equity income funds, wherein knowledge from the group's corporate bond team can be leveraged in order to allow the fund's equity yield premiums to fall to around 115% of the FTSE All Share.
The M&G Extra Income fund, which is ranked 50 on its one year performance out of 92 funds in the Standard & Poor's equity income sector up to 30 August, already contains a corporate bond weighting. The M&G Income fund, which is ranked 42, remains an all equity fund with a 115% yield requirement.
Plackett said he has not yet taken a decision on when corporate bonds would be introduced into the M&G Dividend fund but it was part of the fund's long-term strategy.
Plackett said the strategy was paying off and all of M&G's equity income funds have seen a dramatic turnaround and were above average for the last three to 12 months, compared to their significant underperformance 18 months ago.
The Dividend Fund has three month bid to bid returns of 8.3% compared to a sector average of 6.9%, and negative offer to bid returns of 0.4% compared to a negative sector average of 1.1%.
The plan is a development by managers in the equity income funds sector which has faced difficult times in a market polarised between higher yielding old economy stocks and new economy growth stocks.
Plackett said: "We have structured changes to ensure that we can actively choose stocks from throughout the entire stock market not just the higher yielding sectors. We are still contrarian investors and buy stocks when they are out of favour.
"The strategy has reaped significant dividends in the past six months enabling us to buy old economy in February and new economy in May and August when valuations fell back.
"We are an income team with a growth orientation. My background is in small cap investing and you can't survive in that sector without being a growth investor. What I am trying to do is to bring that to the income funds and make them total return funds as well as income funds."
Plackett's fund now has a strong technology weighting compared to many of its peers. It currently stands at 2% underweight compared to the FTSE All Share. Plackett said the major overweight positions in the Dividend fund, which offers a net income of 3.3%, include financials, media, water, and drinks companies. The water sector holdings, he said, provide a high proportion of the fund's yield requirement, are stable and operate in protected markets.
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