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Newton’s rules

I am sure you do not need me to tell you that the UK equity market is having a tough time at the moment.

I am sure you do not need me to tell you that the UK equity market is having a tough time at the moment.

The new breed of global income funds has also got off to a poor start. An overweight position in financials is the villain, methinks. However, one fund has been able to buck this trend – Newton global higher income.

It used to be the fact that the UK stockmarket was really the only option for those seeking income from equity investing. It was the only market that paid a decent yield and had plenty of potential for he dividend to grow.

Strangely, this was looked at in some quarters as a mark of weakness.

The dynamic and sexy high-growth areas of the Far East and emerging markets did not pay dividends, they could reinvest that money and make more for their shareholders.

Of course, sometimes this is true but my own view is that a dividend is not a sign of weakness but of strength.

The discipline of paying an income to your share-holders every year (and, even better, an increasing dividend) imposes financial discipline on a company. It encourages the sound use of capital and a concentration on maintaining earnings’ growth.

Gradually, the rest of the world now seems to be taking the same view and more and more markets are paying a dividend.

It is no surprise that a number of investment houses have responded by offering income funds in specific areas such as Europe or Asia or have launched a global fund.

Newton has done both, but here I am concentrating on its global fund.

It was launched on November 30, 2005 and although that is not a long time ago in investment terms, it has performed extremely impressively. Not only has it done better than its UK peers but also better than the vast majority of other global income funds.

The fund, which is managed by James Harries and Alex Stanic, makes full use of Newton’s in-house process. This involves analysts looking for thematic ideas wherever they can be found around the world.

On top of this is a buy discipline whereby the new company must have a prospective yield 50 per cent greater than the FTSE World Index before it can be bought for the portfolio.

The current yield on the fund is a healthy 3.7 per cent (variable and not guaranteed).

The fund aims to increase that dividend and what is interesting is that Mr Harries and his team believe dividends are growing more strongly internationally and are likely to outstrip the UK market.

At present, the themes revolve around such things as energy supply, developing economies, reconstruction, demo-graphics and medical technology, to name but a few.

This, I suspect, is one of the reasons why the fund has done so much better than many others because while it has sought income it has also sought growth.

It has been underweight in the financial sector that is being so badly hit by the credit crunch.

A global remit has also enabled the fund to get exposure to the mining sector and, crucially, get a good yield at the same time.

Those funds limited to investing in the UK have not had this option.

To give you an example, one of the biggest holdings is Fording Canadian Coal Trust. It yields 10 per cent and has seen a fourfold dividend increase during the past year.

Telecoms is another important area for the fund, with holdings in LG Telecom and Cable & Wireless. This is a structural growth story centred on data storage. Anyone with a new mobile can see the amount of data that is becoming available and the importance of storage.

One other important point at the moment is that, in currency terms, the fund is largely unhedged which increases the risk should sterling appreciate.

However, given the present state of the UK economy, I believe exposure to overseas currencies will be a big advantage.

I am convinced that, at least in the short term, sterling will weaken further and, despite the cries of some economists and politicians, I think the next move in interest rates will be downwards which is likely to put more pressure on sterling.

So, in conclusion, for those seeking to diversify out of the UK, the Newton global higher-income fund looks to be an excellent long-term choice.

Even if you are not seeking income, remember that the dividends can be rolled up to increase the total return but it is easy enough to start receiving the dividends at a later date.

Although this fund is not in our Wealth 150 list of favourite funds in each sector, we will continue to monitor it for possible future inclusion.

Even in a relatively flat or declining market, there will be themes that are coming through strongly.

It is therefore important to seek out fund managers who can exploit them to the full and hopefully make money for you.

I think Newton is one of them. I am just kicking myself that I did not recognise it earlier.

Mark Dampier is head of research at Hargreaves Lansdown


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