Newton Higher Income Income Units

Newton has recently announced the dividend paid by its Higher Income Fund is to be cut over the next year. Tineke Frikkee, the fund's manager believes the current level of income paid to investors is not sustainable in today's challenging economic climate.

This is the first time the fund's income payment has been cut in more than a decade. Dividends are paid quarterly, and from November investors can expect a smaller payment than last year's equivalent. The next three quarters are expected to be similarly affected, and the total income is expected to fall by around 20-25% over the next year. This will bring the fund's income more in line with its peers.

This is not a decision Newton has taken lightly, but it feels it is necessary in order to boost the fund's overall performance. The fund's focus on the highest yielding areas of the market was thought to be reducing the potential for capital growth. The move towards a lower dividend will allow Tineke Frikkee the flexibility to invest in companies with strong earnings growth and a lower initial yield, but the potential to grow the dividend in the future. Importantly, her long-term objective is to resume the fund's dividend growth trend, albeit from a new lower base.

Tineke Frikkee is using her new-found flexibility to diversify the portfolio. Traditionally high yielding stocks such as BAE Systems, Scottish & Southern Energy and Cable & Wireless will be supplemented with companies thought able to grow their dividends significantly over time, such as Morrisons, Compass and Prudential. Ultimately, only time will tell if this new approach proves successful.

We feel the new strategy is sensible. We have been increasingly concerned about the fund's yield focus, feeling it could be detrimental to capital and dividend growth prospects. We also had reservations about some of the strategies used to achieve its targets. We therefore removed it from the Wealth 150 list of our favourite funds for new investments last year.

We retain our confidence in Tineke Frikkee's ability as a fund manager, and believe she is well placed to deliver good overall returns for long term investors. However, we would like to see how the fund performs relative to its peers following its change in strategy. Potential investors should note that this is a concentrated portfolio, which increases risk as each holding can have a big impact. If our views change, we will keep investors informed.