With stock markets reaching new highs, many financial commentators share a common belief – global economies are on the road to recovery. Newton’s view of the world, however, is very different. For them, the upturn has been driven by government and central bank policy across the globe, rather than from any real economic recovery. They believe an unprecedented amount of quantitative easing has inflated asset prices.
I recently caught up with James Harries, manager of the group’s Global Income fund, who subscribes to the view economies are not recovering. In a lower growth world, in which he anticipates greater stock market volatility, he believes investors will ultimately prize companies offering the potential for growth and stability.
Presently, he continues to favour diversified larger companies with defensive characteristics. He currently has a bias towards the healthcare and telecoms sectors, as well as selected technology and consumer goods businesses. The number of stocks held in the portfolio has reduced in recent months from 60 to around 55 names. This reflects the manager’s view that stock markets are generally more fully valued.
That said, the fund’s exposure to the US has grown considerably in recent years. Harries accepts the US is not the most attractively-valued market, yet he believes there are still a number of stocks which, despite being good businesses, are undervalued by other investors. New holdings include McDonalds, which currently yields 3.6 per cent, and payment service provider Western Union, with a yield of 3 per cent.
The fund itself currently yields a healthy 3.5 per cent, although its history of dividend growth has not always been smooth. Indeed, it has been impacted by the fund’s ever-increasing exposure to the US – pay-out ratios there tend to be lower than many other regions given a general preference for share buybacks over paying dividends. The fund’s prospect for dividend growth this year is fairly flat, impacted by a dividend cut of 30 per cent by Centrica.
One region in which Harries expects to increasingly find opportunities is emerging markets. He will, however, continue to avoid investing in China for the foreseeable future based on his negative outlook. Chinese growth is slowing and he is concerned over the unsustainably high levels of debt of Chinese businesses. Harries believes China may also look to devalue its currency in future. If this occurs it could mark an inflection point for the global economy and it would also prove a negative for sterling-based investors.
In my view, this fund should come into its own and offer some shelter in challenging market environments. If the team at Newton are proved right, it should ultimately prosper against many of its peers. However, the team also need to be careful not to back themselves into a corner in the event they prove to be wrong. Over the past five years we have seen a number of other fund managers, whose strong views have turned out to be wrong, impacting their performance. That said, these have tended to be the managers who anticipated a much quicker return to a normalised economic cycle.
I have much greater sympathy with the Newton view. Financial crises, such as the one witnessed in 2008, take a considerably long time to resolve. Furthermore, I believe any kind of normalisation of interest rates remains a long way off.
While the fund’s avoidance of more cyclical and lower quality areas of the market has led to a shorter-term spell of more subdued performance, its global thematic approach has proved a success over the long term. I continue to view the fund as a sensible core holding to a diversified portfolio.
Mark Dampier is head of research at Hargreaves Lansdown