Newton - the outlook for income from emerging markets

Kate Marshall | Fri 02 March 2018

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• The team remains focused on companies with sustainable cash flows, earnings, and dividends
• Emerging markets income funds have tended to underperform the broader market over the past year
• A lack of exposure to high-growth technology companies has not helped

Our View

This fund combines exposure to the long-term growth potential of emerging markets, with the attraction of a regular income. Sophia Whitbread, the fund’s lead manager, has been involved in running the fund since its launch in 2012 and has the support of a broader team of portfolio managers and analysts at Newton.

Newton adopts a sensible investment approach, which they have followed for many years. They remain focused on the long-term sustainability of the businesses they invest in, and the earnings and dividends they generate. The fund currently yields 3.35%, although this is not guaranteed nor a reliable indicator of the fund’s future income.

Several Asian and emerging markets income funds underperformed their benchmarks over the past year, including the Newton Emerging Income Fund. We believe the fund has the potential to deliver good long-term returns for investors, although it’s not on the Wealth 150+ list of our favourite funds. We would like to see Sophia Whitbread and the team at Newton build a longer track record on this fund before considering it for the list.

Performance and positioning

Emerging stock markets delivered exceptional returns over the past year. A lot of this performance was driven by a relatively small number of companies, including those in the technology sector. A number of large Chinese internet companies, such as Alibaba and Tencent, performed particularly well.

These companies don’t tend to pay high or regular dividends to shareholders. Instead they often reinvest their earnings in order to finance new projects or enhance future growth potential.

Most emerging markets income funds don’t invest in these companies due to the lack of income on offer. As a result, they’ve tended to miss out on the recent gains made in these higher-growth areas. Over the past year the Newton Emerging Income Fund still delivered a positive return of 9.5%*, but underperformed the FTSE Emerging Index, which grew 22.0%. Please remember past performance is not a guide to future returns and investing in emerging markets makes this fund a higher-risk proposition.

Newton Emerging Income - one year peformance

Past performance is not a guide to the future. Source: Lipper IM to 31/01/2018

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2018

On the other hand, investments in South African companies benefited performance, including pharmacy group Clicks and hospital company Life Healthcare. Clicks announced a positive set of results and the outlook for the business remains positive, supported by rising urbanisation and increasing life expectancy, which could increase the demand for medicines and healthcare.

Elsewhere, the team recently added a couple of new investments in the financials sector. This includes Reliance Nippon Life, one of India’s largest asset management companies. India’s asset management and fund industry is growing rapidly, partly because the government has introduced policies to encourage people to switch out of more traditional means of saving, such as gold and property, and into other financial assets. The team believes the company is well-placed to benefit from this ongoing trend.

Overall the team invest in a relatively small number of investments, which means each one can have a significant impact on performance, although it increases risk.

Outlook

The team is optimistic about both the income and growth potential of companies based across the emerging markets. There has been an increasing number of businesses willing to pay dividends to shareholders and the team expects this to continue. Earnings growth across the region has improved over the past year, and this could support rising dividends.

Companies yielding greater than 3%

Source: Newton, correct at 30/09/2017

The team remains focused on companies they can buy at a sensible share price, which also generate strong cash flows and the ability to steadily grow their dividends.

Long-term growth across the developing world should also be supported by a young and growing population, and the willingness of governments to implement well-needed economic and political reform. These changes could improve economic growth, productivity, and standards of corporate governance.

Please note the fund's charges can be taken from capital, which can increase the yield, but reduces the potential for capital growth.

Find out more about this fund including how to invest

Please read the Key Features/ Key Investor Information in addition to the information above.