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Newton Higher Income Fund research update

Heather Ferguson | Wed 01 April 2015

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.

The Newton Higher Income Fund, managed by Christopher Metcalfe, has been renamed the Newton UK Income Fund, effective from 1 April 2015. The change has been made to reflect that the fund invests predominately in UK-listed companies. The manager's philosophy and investment process remains unchanged and he will continue to seek businesses capable of maintaining and growing dividends over time, while aiming to grow the fund's capital over the long term.

The change in name does not indicate an intention to reduce the level of income paid by the fund; it will still seek to provide a yield in excess of 110% of the FTSE All Share Index. However, the fund's yield discipline has been removed. This dictated a stock could only be bought if its prospective yield was greater than 75% of that of the index, and sold should the yield fall below 50% of that of the index. This should allow the manager greater flexibility when choosing investments to buy or sell. The fund currently yields 3.8% which is variable and not guaranteed.

The manager continues to seek companies with strong, sustainable cash flows in sectors not overly sensitive to economic activity, such as the infrastructure, tobacco, healthcare, utilities and media sectors. He is particularly positive on the healthcare sector and investments in this area currently account for 17% of the fund. Research and development productivity is increasing as pharmaceutical companies increasingly focus on specific areas of expertise rather than compete across the entire drug spectrum. He is excited about the prospects for a new family of cancer drugs known as PD1s and has invested in three of the four companies involved in their development; AstraZeneca, Roche and Merck.

Christopher Metcalfe remains positive on the outlook for UK companies and expects investors' demand for income to push share prices higher. However, as the upcoming UK general election could cause short-term stock market volatility, he is also making use of the fund's flexibility to invest overseas. Almost 16% of the fund is currently invested in non-UK holdings.

The fund is relatively concentrated with 51 stocks which allows each holding to have a significant impact on performance but it is a higher risk strategy.

Investors should note the fund's charging structure has also been amended. Previously, the annual management fee was deducted from capital, with all other expenses deducted from income. From 1 April 2015, all charges may be taken from capital. While this increases the amount of income available for distribution, it can erode the capital value of the fund.

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Our view on this fund

Christopher Metcalfe is an experienced UK investor; although his experience in running an income-focused portfolio is relatively short. He has managed the fund since 20 March 2014. Over his tenure, the fund has so far returned 10.9%, compared with 9.1% for the FTSE All Share Index and 9.3%* for the IA UK Equity Income sector. Our analysis attributes this outperformance to a combination of good stock selection and sector positioning, although this is over a short timeframe and past performance is not a guide to future returns. We would like to monitor his performance for a prolonged period before considering this fund for inclusion on the Wealth 150 list of our favourite funds across the major sectors.

Performance of the Newton UK Income Fund over the manager's tenure

Past performance is not a guide to future returns. Source: Lipper IM * to 02/03/15

Annual percentage growth
Mar 10 -
Mar 11
Mar 11 -
Mar 12
Mar 12 -
Mar 13
Mar 13 -
Mar 14
Mar 14 -
Mar 15
Newton UK Income 9.33% 3.97% 13.34% 12.98% 10.38%
IA UK Equity Income 15.47% 2.03% 14.88% 16.87% 7.73%
FTSE All-Share TR 14.83% 3.42% 13.26% 11.20% 7.15%

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

The value of investments can go down as well as up, this means you could get back less than you invested. Therefore all investments should be regarded with a long term view. No news or research item is a personal recommendation to deal. If you are unsure about the suitability of an investment please contact us for advice.
Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.


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