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Newton chief defends using derivatives to boost income

Newton higher-income manager Tineke Frikkee has rejected concerns about the use of inc-ome-generating derivatives in her £2.7bn fund after Hargreaves Lansdown cut the fund from its Wealth 150.

Hargreaves axed the fund due to concerns over the excessive use of covered-call options and special cum dividends. It claims that the decision by BP to suspend its dividend had affected the fund, which has an 8 per cent weighting in the oil giant.

Hargreaves Lansdown senior analyst Meera Patel says the firm has some short-term concerns despite BP being set to resume dividend payments in the first six months of next year.

She says: “The increased use has driven up the yield and we feel this could potentially affect the fund’s capital growth.”

However, Frikkee says the special cum dividend is only slightly up on its average in the past four years while the use of covered call options was down when the BP dividend was cut.

She says: “Special cum dividends have been 3-4 per cent of income on average in the last four years. Since BP, it has risen to a 5.7 per cent contribution of income. We have had the third-quarter dividend and it is gradually moving back to its average level which it could reach by December.”

Frikkee says the group had seven days’ trading – between the BP announcement of cutting its yield and the fund’s quarterly trading statement – to address the cut and that the only way was to introduce a special dividend cum yield.

She says: “Luckily, the cut saw yields fall and we had three stocks recommended and they replaced BP. This saw the cum dividend yield rise above its traditional level but it was a one-off that is already being addressed.”

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  1. This fund has a prestigeous history of generating dividend growth year on year, almost since launch in 1986.
    This move has caused me some degree of conceren as I always believed that its universe was the FTSE350.
    However, the main driver to use the fund is for income generation with a degree of capital growth sufficient to offset inflation in its distributions. As long as this is still achievable and continues as such, I am sanguine about the situation.
    I respect Tineke and have met her on many occassions. I do not believe that she would have made this decision lightly. However, this is one of the highest yielding UK equity funds around, is it misguided to keep chasing ever higher income at the possible expense of long term income growth? Open question.

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