Hunt for yield leads U.S. mutual fund managers to private assets

[September 17, 2016]  By David Randall

NEW YORK (Reuters) - With traditional dividend-paying stocks such as utilities and telecom companies trading near record highs, U.S. mutual fund managers desperate for income are increasingly taking a new tack: going private instead.

Fund managers from firms including Fidelity and BlackRock are turning to private assets ranging from direct ownership of oil wells to music royalties, all in search of higher income.

Private assets, in some cases, are offering two to three times the investment yield of popular dividend-paying stocks. While often seen as riskier because they may not be as liquid as publicly-traded stocks, fund managers say that private assets are becoming more attractive as traditional dividend stocks get more expensive.

"The valuations of traditional yield instruments have gotten extraordinarily rich," said Jim Marrow, a portfolio manager at Fidelity.

"We're finding that by being more creative in private investments, we can find better economics," he said, adding that his fund has been investing in oil wells with yields that can touch 13 percent.

Stocks with dividend yields in the top third of the S&P 500 are outperforming those in the bottom third by 13.3 percent for the year to date, according to RBC Capital Markets. That, in turn, has pushed the valuation of utility and telecom stocks above that of the broad market, sending dividend yields lower.

Utilities stocks in the S&P 500 yield 3.5 percent, just one percentage point more than the broad index and about 30 percent less than the sector yielded in 2010, according to Yardeni Research.

The S&P 500 Dividend Aristocrats index - a group of companies such as Hormel Foods Corp <HRL.N> and Cincinnati Financial Corp <CINF.O> that have increased their dividends every year for the last 25 years - yields 1.7 percent, according to Morningstar data.

A screen displays stock charts while a trader works at his post on the floor at the New York Stock Exchange, May 30, 2013. REUTERS/Brendan McDermid

Fidelity and other firms such as T.Rowe Price <TROW.O> have been increasing their stakes in private firms such as Uber Technologies Inc [UBER.UL] and Airbnb since 2014 in anticipation of hot initial public offerings, yet Marrow said that this was the first time that he was investing in private assets mainly for yield.

Floyd Tyler, portfolio manager of Memphis-based Preserver Partners, said that he now has 15 percent of his mutual fund portfolio in private assets including songwriting credits and photo royalties generated by well-known prints of artists such as the Beatles and Prince, which can yield up to 7 percent.

"We see royalties as an uncorrelated, high-coupon return stream. It doesn't really matter what is happening capital markets, there will always be an interest and demand" for proven intellectual property, he said.

Todd Rosenbluth, director of mutual fund research at S&P Capital IQ, said that risk of holding private assets comes when a manager needs to sell them and may not find a buyer quickly. Managers "will face challenges if and when the fund faces redemptions," he said.

(Reporting by David Randall; Editing by Daniel Bases and Alan Crosby)

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