The team which manages the Newton Asian Income Fund will be given increased flexibility to run the portfolio. The income requirement for individual shares will be relaxed in order for the team to focus on growing the level of income, without constraining the potential for capital growth, over the long term.
The team will be able to invest in companies with a lower starting yield, but where they see the potential for income growth. From 26 May 2016, the fund will aim to achieve an annual income 25% higher than the benchmark index, compared with 35% previously. The team will therefore be less likely to invest in companies with unsustainably high dividend yields, or those with less opportunity for income growth, simply to meet a higher income target.
The team will also have greater flexibility around when to sell shares. As a company's share price rises, its yield falls, but this does not mean it is no longer paying attractive levels of income. Historically the team have been forced to sell shares in a company if its yield falls below a certain level. The level at which they are required to sell shares has been reduced, meaning they can maintain an investment in a company paying attractive dividends, or with the potential for further capital growth, for longer.
The team's investment universe will increase as a result of the changes and we view the increased flexibility afforded to the team positively. We prefer managers to adopt an unconstrained approach in order to achieve their objectives and believe it presents greater opportunity for the team to deliver better long-term total returns (income and capital growth). The fund currently yields 4.44% (variable and not guaranteed).
Newton has demonstrated a commitment to long-term investing in the Asian region and the team continue to have the support of the group's large bank of analysts. That said, the fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors. Jason Pidcock, previously a long-standing and experienced member of the team, left the group last year, which we felt was a loss for the remaining team. We would prefer to see how the team fare for a period of time before reconsidering its position.
The fund performed well over the past year, outperforming its benchmark, although past performance is not a guide to the future. It has been a volatile year for Asia Pacific markets and against this backdrop the team's relatively cautious outlook and defensive positioning within the portfolio proved beneficial.
The past couple of months saw a turnaround in performance of commodity-related sectors. The fund's lack of exposure to mining and oil & gas companies meant the fund lagged the recent market rise, although this positioning paid off over the course of the past year. The team believe a sustained recovery in commodity prices is unlikely, and the fund remains positioned to reflect this view.
Overall, the fund is biased to developed Asian markets, such as Australia, Singapore and Hong Kong, and sectors that have tended to be less sensitive to fluctuations in the economic cycle, such as telecoms and utilities. Companies generating robust cash flows which can support dividend payments to shareholders continue to be favoured.
Please note the fund invests in a concentrated number of shares meaning each can have a significant impact on performance, although it is a higher-risk approach. The fund can also invest in emerging markets and smaller companies, which increases risk.