Going global

Equity income funds traditionally seek to deliver both growth and a regular rising income from a portfolio that emphasises shares with high dividends. Until relatively recently, funds of this type tended to focus on the UK stock market as British companies had historically offered far higher levels of dividend than their overseas counterparts.

But recent years have seen the level of dividend yield in overseas markets dramatically improve owing to a number of factors. The most prevalent has been the concerted efforts made by companies in such markets to attract a wider investment audience by offering shareholder value in the form of dividends, as well as capital gains.

This change of emphasis has come about for a number of reasons, including the prolonged bear market that followed the bursting of the TMT bubble at the start of the decade, which forced investors to focus on the importance of dividends. Today's low nominal return environment and increasingly ageing populations also help to maintain an ever growing constituency for real income generating assets.

More broadly, the establishment of dividends and a commitment to grow them is a function of the increasing maturity and sophistication of many developing world capital markets.

Newton spotted this opportunity very early and became one of the first UK fund managers to offer a truly global equity income fund with levels of yield that were much in line with more mainstream UK equity income funds.

The Newton Global Higher Income Fund employs the same sort of strict yield criteria as the flagship Newton Higher Income Fund. The latter celebrated its 23rd birthday at the start of June and throughout its long life it has consistently offered one of the very highest levels of income for a fund of its type. It's partly this consistency of approach and objective that has helped the Newton Higher Income Fund to grow well past £2 billion in size today¹.

By applying Newton's thematic approach alongside its yield discipline, the Newton Global Higher Income Fund has set new standards in the IMA Global Growth sector while offering many UK investors their first genuine opportunity to diversify their income portfolios away from the UK market.

The Fund's approach leads to companies that are thematically attractive, have sound fundamentals and which offer a substantial yield. As a result, the portfolio stocks with high free cashflow yields, higher returns on equity, higher levels of potential earnings growth and lower P/Es than those of the broader market. In essence, the Fund sets out to offer income investors a genuine opportunity to benefit from the best yielding stock opportunities in markets across the globe.

Should any holding see its yield fall to market levels - either through strong price performance or because of a reduced dividend, it will be sold. This enables the Fund to book all of the profits on a strongly rising stock and to recycle the proceeds into the latest thematic ideas being generated by Newton's extensive team of career analysts. With global growth now faced with such significant headwinds and interest rates in the western world already at historic lows, such yield discipline will be highly attractive.

The Newton Global Higher Income Fund celebrated its fourth birthday on 30th November 2009. Since launch, it has hardly left the very top quartile of the IMA Global Growth sector and, by its third anniversary, it had outperformed the average fund in its sector by very nearly 21%².

The Fund was constructed to capture the best of global dividend opportunities wherever they might arise and represents a marriage of two of Newton's long-standing investment strengths. One is its expertise in managing equity income funds; the other is its enviable track record in managing global equity portfolios.

Unlike many competing funds, the Newton Global Higher Income Fund has the flexibility to invest in any global market, without being constrained by its FTSE World Index benchmark. However, like all Newton funds, its investment approach is underpinned by Newton's unique global thematic investment process.

As James Harries, the manager of the Newton Global Higher Income Fund explains, "Part of the Fund's great appeal for UK equity income investors is that only around 10% is allocated to sterling assets. It's this diversity that has helped to drive returns.

"Because a stock's yield is the key determinant for us," he says, "the US market, where yields are generally far lower, currently only accounts for around 24% of the Fund's allocation; Japan is another major underweight. The remainder is currently shared between a 29% holding in euro-denominated assets, 16% in Asian holdings and around 5% in Latin America."

Maintaining a high level of yield in the portfolio has also delivered other benefits. "The bottom line," says Harries, "is that yield is far less volatile than growth. This is because any attempt by a company to reduce the level of dividend it pays is usually seen as a serious warning sign by investors. This is reflected in the consistency of the Fund's returns," he says

"Because the Fund currently yields 5.2%² it is better positioned to withstand capital volatility in equity markets than its purely growth-oriented peers," he says.

If nothing else, the recent credit crunch has underlined the benefits of being able to take a truly global view that is unconstrained by any other consideration than the need for a decent yield.

As Harries explains, "Thematically, Newton has been very bearish towards developed world banks and consumers for a number of years thanks to our former 'debt & credit' theme. So when the crunch initially hit in 2007 it mostly passed the Fund by as we held no UK, US or Australian banks.

"Since we launched in 2005, we've always focused the Fund's financial holdings on Asian and other developing markets," he says. "In these markets the credit cycle is still in its infancy. Consequently, the Fund benefited greatly from its holdings in stocks such as DBS of Singapore and Banrisul of Brazil.

"Similar thinking has led us to be very under represented in consumer cyclical sectors and areas such as real estate which have also been quick to suffer in developed markets as the availability of borrowing has just dried up," says Harries.

In the nearer term, market conditions look likely to continue to favour the Fund's thematic, yield-driven approach. "The Fund maintains a relatively defensive stance in most sectors," says Harries, “while being patient will allow us to take advantage of some of the tremendous opportunities that are still on offer," he says.

^* Source: Newton as at 30 September 2010. It should be noted that a steady and rising income received from an investment is what really matters with the opportunity to grow capital over the long term. Therefore, steadily growing dividend payouts, rather than the current yield, may serve as a better indicator of the actual health of the underlying investment. When considering the net current yields or historic yields on a fund it is important to understand how they are calculated. They are calculated on the basis of dividing the last 12 months' dividends by the current share price. Due to the calculation method, at times yields may be high and rising as a result of a falling share price, i.e. capital depreciation on your assets, and not a rising dividend. Please remember that dividend income is not guaranteed and may fall as well as rise due to stock and currency movements.

¹ Source: Newton Fund size £2,847.66 as at 31st December 2009.
² Source: Lipper as at 30 November 2009. Three year total return including income net of UK tax and annual charges, but excluding initial charges. Past performance is not a guide to future performance.