THE decision by Fidelity's Magellan Fund not to pay a dividend will accelerate investors' disenchantment with unit trusts, according to Jim Mellon, chairman of Regent Fund Management. Mr Mellon predicted yesterday that the industry's redemptions would continue to rise as the flood of investors from equities into higher yielding fixed-interest securities gained pace. On Tuesday, Fidelity Investments caused a ripple along Wall Street after announcing that no dividend was due from the mutual industry's US$35 billion giant. The fund is the mutual industry's equivalent of IBM - a fund with a distinguished pedigree and a standard-setter. With about 2,500 stocks, it is one of the few funds in the world whose investment policy can influence its own performance. Some of its former fund managers, such as Peter Lynch, under whose stewardship funds under management swelled from $20 million to $12 billion, have attained star status. Fidelity's spin-doctors yesterday made light of the decision, maintaining that it was all down to a mathematical error. In recent months, Fidelity has been telling investors calculating their potential tax liability from distributions that the Magellan Fund would be making a year-end payment of $4.32 per share. The fund makes two distributions a year - in May and December - and has already paid out $2.77. There had been no general release about the distribution, and the prospective return had only been indicated to investors who had called to express concern over their potential tax liability. But seeking to clarify its position last night, the fund manager said that distributions were based on realised gains plus income. When it calculated the year-end distribution, it found it had already satisfied its investors' requirements. The decision to hold the payout at $2.77, against last year's total of $7.25 per share, did not reflect a negative performance, the statement from Fidelity said. The payment would have amounted to $2.3 billion based on the fund's 536 million outstanding shares. Fidelity has saved its investors the tax problem but created a bigger one for its well-modulated public image. The company said investor response had been indifferent, with less than 100 of its 200,000 daily callers wanting to know more about the non-arrival of their distribution. Nor did it expect shareholders to redeem shares because of the issue, claiming that most reinvest distributions into the fund rather than receive cash. Fidelity's critics were yesterday sniping, one claiming that the company 'obviously had administration problems, despite its image of being very efficient'. The company stressed that neither customers nor the fund's share price had been affected. From the industry's perspective, the revision could not have come at a worse time. American investors, and their Hong Kong counterparts, who are justifiably jittery about the performance of world stock markets, had their confidence knocked again by the Orange County debacle. Fidelity's decision, for itself, is unlikely to have any impact other than to heighten the growing feeling of ill-ease. Most fund managers in the Hong Kong unit trust industry were yesterday saying it would have no impact on investor sentiment. Mr Mellon said: 'We are at the beginning of a bear run for the mutual fund industry. The days of Dutch tulip bulb picking for the unit trust industry are over.' The company dismissed that as 'bull', arguing that the vast majority of its shareholders reinvest distributions into the fund rather than cash. Since its launch, it has provided an annual return of 22 per cent, falling to 18 per cent over 10 years and 12.2 per cent since 1991. But in an industry where prospects are as much based on 'animal instincts' as earnings growth, the mood is not comforting.