Performance warning for new equity income funds

Euro coinsActive fund managers who launch equity income funds may find it difficult to outperform other types of products, including passive vehicles, because the dividend sector is crowded and competitive, says Cerulli Associates.

As well as passive vehicles like exchange-traded funds, the equity dividend sector is also competing with multi-asset funds that offer income and also with broader equity funds that invest in dividend-paying companies, says the analytics firm.

"Those not already positioned in the equity income space should think twice before launching a product, especially an active vehicle, which may find it difficult to outperform exchange-traded funds," says Brian Gorman, an analyst at Cerulli.

"Even some of those already in the sector might consider a change of focus to a more general, less demanding equities category, while continuing to reap the benefits of dividends."

Record dividends are boosting equity income funds, helped partly by an improved economic backdrop in Europe that has increased corporate profitability.

UK-centered equity income funds are gaining most, as UK companies pay the biggest dividends. However, Europe-wide, assets under management in the equity income sector have risen to €276 billion, says Cerulli quoting a Lipper figure, almost doubling since the end of 2012.

In its monthly products trends report, The Cerulli Edge, the firm says asset allocation funds have seen the largest inflows, having increased assets by 26% since the beginning of the year to reach €434 billion in AUM in June 2015, up from €345 billion in 2014.

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