A long-term structural shift in the economy will make ordinary people poorer as the largest companies become more profitable, according to Steven Andrew (pictured), manager of the M&G Income Multi Asset fund. 

A survey for Capita Registrars, published this morning, showed the dividends paid out by UK companies in the second quarter were at record levels and Andrew believes corporate strength in the country is not a short-term phenomenon. 

"We are seeing a reversion to a cyclical rising trend. We had a long period of households doing very well while corporate margins were being squeezed and we are now going through a period of households doing poorly and high corporate profitability," he said. 

Research from Alliance Trust, also published this morning, backed up Andrew’s comments about deteriorating living standards in the UK. 

The second quarter saw a fall in the company’s Financial Reality Index, measuring households’ perception of their economic circumstances.

Linsey Thomson, senior economic analyst at the Alliance Trust Economic Research Centre, said: "Financial conditions facing households up and down the country remain very tough."

"The index and all three sub-indices are still well below the critical level of 100, indicating that conditions remain weaker than the long-term average." 

"In Q2, the index was pushed even lower due to renewed weakness in housing and equity markets, together with a fall in disposable incomes and continued lacklustre economic activity." 

Andrew says that defensive stocks have been the best performers in the UK during the financial crisis and, as they are typically those with the highest dividends, this has been driving the strong overall returns and popularity of income funds. 

M&G Income Multi Asset sits in the IMA Mixed Asset 20-60% Shares sector, but Andrew has 41 per cent in equities and says he could go as high as 51 per cent, seeing plenty of opportunity in corporates despite the global economic slowdown. 

However, data from FE Analytics shows the fund's top holding is currently a bond of UK corporate Northern Trust. 

Long-term UK gilts are the third-biggest weighting in the portfolio, but Andrew says he has an ambivalent attitude to the bonds. 

"I am a reluctant holder of gilts, reluctant because I don’t like the volatility. I do have 12 per cent in my portfolio, which is reasonably volatile so I need to balance that. Mexican government bonds have been better for volatility." 

Andrew adds that he sold down his holdings in Mexican bonds to 1 per cent two weeks ago.

Performance of fund vs sector since launch



Source: FE Analytics

The fund launched in December 2010 and has performed strongly so far, soundly beating its sector average over the period.

Andrew says that the medium-term outlook for the UK is not good, with the economy unlikely to recover before the imbalance between corporates and households reverses. 

He adds that Government spending has actually risen since the Coalition came to power, making nonsense of much of the public discussion of austerity. 

"The UK has done a tremendous job of communicating an austerity that doesn’t exist," he finished.