COVER STORY
Slipping away
There is a cardinal rule of the UK investment landscape that has been around for as long as anyone can remember . Dividends are good and investors love them . Yet there is now a budding debate among City investors as to whether the UK ’ s dividend romance may actually be a toxic relationship . In a letter to The Financial Times last year , Paul Marshall , billionaire chair of hedge fund Marshall Wace , said the dividend obsession of UK equity income fund managers was turning the FTSE into a “ Jurassic Park ” whereby “ clipping coupons ” was more important than funding innovation . Taken at its most simplistic level , the argument is this : as more of companies ’ free cashflows drift away from their balance sheets and into shareholders ’ bank accounts , there is less to re-invest back into the business to fund further growth . The problem compounds over time and both the market and economy suffer . Is this why the UK has fallen so far behind other global markets , where excess cash is more likely to be reinvested for future growth than showered on external stakeholders ? Are we perhaps dividend addicts in need of some cold turkey ?
Wagging the dog Steve Clayton , a manager on the HL Select fund range , accepts the UK market is unusual in its enthusiasm for dividends . However , he says its high payouts are driven by the structure of the market rather than the other way round . For example , a significant proportion of the index is made up of natural resources and energy stocks . These sectors have high initial capex costs for digging mines and drilling for oil , but they can return significant amounts of money to shareholders if there is an increase in the price of the underlying commodity and cashflows surge .
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