Newton Global Income Fund research update

Heather Ferguson | Wed 01 April 2015

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The Newton Global Higher Income Fund, managed by James Harries, has been renamed the Newton Global Income Fund, effective from 1 April 2015. The change has been made to align the fund's name with Newton's other equity income funds and does not indicate an intention to reduce the level of income paid by the fund. The manager's philosophy and investment process remains unchanged and he will continue to seek businesses capable of maintaining and growing dividends over time.

James Harries' approach is based upon his conviction that no company, market or economy can be considered in isolation; each must be understood in a global context. He identifies and selects the companies he feels are best placed to benefit, focusing on those which are attractively valued, cash-generative and paying a reliable dividend.

Low global growth is currently a key theme within the portfolio. In this scenario, the manager expects investors to prize investments which are able to grow regardless of the economic environment. He is particularly positive on companies within the healthcare and telecoms sectors; these areas currently account for 24% of the fund. Conversely, he is cautious on the financial sector and avoids companies which could be challenged by government regulation.

Since launch in November 2005, the fund has outperformed the FTSE World Index by 38.5%, returning 146.1%*. Our analysis suggests this outperformance has been led by the manager's sector positioning - reflecting the success of his thematic approach. Please note past performance is not a guide to future returns.

Performance of the Newton Global Income Fund since launch

Past performance is not a guide to future returns. Source: Lipper IM * to 02/03/15

The fund's exposure to the US has grown considerably in recent years. While James Harries accepts the US is not the most attractively-valued market, he believes there are still a number of stocks which, despite being good businesses, are undervalued by other investors. He has recently initiated investments in McDonalds, the fast food restaurant, and payment service provider, Western Union.

He is positive on the prospects for McDonalds as it owns a lot of US property which when valued in isolation accounts for the majority of the value ascribed to the business. This leaves the operating business looking unduly undervalued, in the manager's view. Equally, he feels investors have underestimated the potential for Western Union. The stock has been out of favour as people increasingly transfer money through companies offering mobile payments. However, he feels security conscious governments will eventually want these companies to partner with more traditional firms such as Western Union to help better track overseas payments.

The manager currently has little exposure to emerging markets but expects to increasingly find attractive opportunities in the higher-risk region. However, he has avoided Chinese businesses as he is concerned their high level of borrowing is unsustainable. He also feels they may need to devalue their currency in the future which could be negative for sterling-based investors. Emerging markets can offer significant opportunities for growth, but are more volatile, so a long investment horizon is required. The fund manager also runs a concentrated portfolio which allows each stock to make a significant contribution to performance, but is higher risk.

Investors should note the fund's charging structure has also been amended. Previously, the annual management fee was deducted from capital, with all other expenses deducted from income. From 1 April 2015, all charges may be taken from capital. While this increases the amount of income available for distribution, it can erode the capital value of the fund.

Our view on this fund

James Harries and his team at Newton have a superb track record and have implemented their thematic approach with great success. Its international approach could add diversification to an equity income portfolio and in our view James Harries has the resources to outperform his peers over the long term. He takes a contrarian view to many other managers in the sector which means it can perform quite differently to the peer group at times. We are pleased to retain this fund on the Wealth 150 list of our favourite funds across the major sectors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.