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Newton plans up to 25% dividend cut on higher income fund

BNY Mellon Asset Management is cutting up to 25 per cent of the dividend yield on its flagship £2.6bn higher income fund in a bid to boost performance on the product.

The move is designed to allow fund manager Tineke Frikkee a wider remit to invest across the market rather than focussing on the higher yielding areas of the market.

Newton says the decision has been taken in response to the challenging market environment, characterised by low returns and low yields across asset classes, which means the current dividend payment is unsustainable. It says a more realistic payout is estimated to be some 20-25 per cent lower than those made over the last 12 months.

Frikkee’s fund is one of the highest yielding in the UK equity income sector, the fund currently has an annual yield of 7.38 per cent. However, performance on the fund has struggled having recorded third quartile returns in the sector in the past three years.  Concerns have also been made about the fund from advisers.

In October 2010, Hargreaves Lansdown axed the fund from its wealth 150, citing concerns with the level of covered-call options and special cum-dividends used by the fund.

The objectives on the fund will remain unchanged.

Newton chief investment officer Jeff Munroe says: “In this environment supporting the current dividend level would increasingly affect the Newton higher income fund’s overall return to investors. The change will give us increased flexibility to invest across the spectrum of UK equities.

“The Fund will have access to a wider range of high quality companies paying dividends that are higher than the average in the UK equity market, and also provide greater potential for capital growth. We believe the revised dividend yield remains very attractive and from here we are confident that we can grow the income on an annual basis.”

Newton is also merging its £77m UK equity and £104m growth funds into its £1.3bn income fund. The income fund will then be renamed UK equity.

All three funds are currently managed by Richard Wilmot. Wilmot has managed the growth fund since December 2005, the fund is currently second quartile over three years in the IMA UK all companies returning 7.4 per cent compared to a sector average of 5.4 per cent. Wilmot replaced Christopher Metcalfe on both the UK equity and UK income funds in 2010 and 2011 respectively.

The new UK equity fund will focus on delivering long term capital growth with some income through a portfolio of approximately 100 UK stocks.

Munroe says: “This move is designed to better position our UK range in the eyes of our investors. The newly merged Newton UK Equity Fund will be well positioned to take advantage of a large number of opportunities in the UK equity market at attractive valuations.”

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