The Newton Global Income fund is 10 years old this month. Not terribly remarkable when compared with the likes of Foreign & Colonial’s investment trust, which launched in 1868, but more impressive when viewed in the context of global income funds.
Global income funds are a relatively new concept and Newton was one of the first groups to try its hand. UK equity income is likely to remain the bedrock for income-seeking investors. However, the primary dividend paying companies in the UK are currently concentrated in a few sectors where there is concern about whether yields will be maintained, let alone grow. This, combined with a growing focus on shareholder returns across the world, is reason to consider diversifying overseas.
Newton’s investment process involves looking at the globe through a thematic lens. This helps to identify the opportunities facing the world and subsequently the best companies to profit from them. Of course, the team does not always get it right but, since launch, the fund has produced annualised returns of around 8.3 per cent.
For the past few years, the views of manager James Harries and his team have proven pessimistic. For example, many individuals view the economy as a machine: quantitative easing is entered one side and economic recovery and inflation is produced the other. Conversely, Harries believes QE will have a deflationary effect, which may restrict the ability of companies to raise prices and grow profits. With this in mind, he does not believe QE prompts a self sustaining recovery.
Elsewhere, he feels a long period of low interest rates combined with over-optimism has led investors to “stretch for yield”, which has resulted in money flowing to poorer credit areas such as emerging markets.
Harries likens the current economic environment to a circus act, with the entertainer (central banks) trying to keep a number of plates spinning. The widespread belief is that interest rate rises are on the horizon. However, the manager expects rates in the US to rise by an insignificant amount in the short term before falling again shortly after. In addition, his view – unpopular and unfashionable a couple of years ago but now starting to be accepted by the mainstream – is that the US will issue a fourth round of QE.
In light of these views, Harries has focused on high quality businesses with predictable earnings. Although these companies are generally expensive, he expects further QE to underpin demand. The US in particular, which is where around 55 per cent of the fund is currently invested, is highly valued. However, Harries has uncovered a number of companies in this area which he feels have been undervalued by other investors. This includes Proctor & Gamble, a recent addition to the fund, which has suffered from a strong dollar.
Harries has generally focused on relatively defensive areas such as healthcare and telecoms. He has avoided mining companies as he feels the high level of oversupply in the industry means it will take a lot longer than people expect for the sector to fully recover. While he expects further weakness in emerging markets and Asia in the short term, he is positive on its long-term prospects and is waiting for a good opportunity to buy into the region.
Up until quite recently, the UK stockmarket was almost the sole hunting ground for income. However, this fund’s historic yield of 3.9 per cent proves this is no longer the case. This is not a fund for the bullish investor who expects a significant rise in interest rates. Indeed, its defensive position means it could perform well if turbulent times are ahead. With this in mind, it is well suited for more cautious investors who feel, like me, the fallout from the financial crisis could have further to go.
Mark Dampier is head of research at Hargreaves Lansdown