The team which manages the Newton Emerging 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 have greater flexibility over 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 will reduce from 26 May 2016, meaning they can maintain an investment in a company paying attractive dividends, or with the potential for further capital growth, for longer.
The fund's benchmark index will also change from the FTSE Emerging Index to the MSCI Emerging Market Index. Newton believe this will make the fund more comparative with its peers, the majority of whom tend to use the latter benchmark.
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 better opportunity for the team to deliver better long-term total returns (income and capital growth). The fund currently yields 4.37% (variable and not guaranteed).
Newton has demonstrated a commitment to long-term investing in the higher-risk emerging markets 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 this is not a guide to the future. It has been a volatile year for the emerging 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. As a resource-rich region, the Brazilian stock market also rebounded. The fund's lack of exposure to mining and oil & gas companies, as well as Brazil, meant the fund lagged the recent market rise, although this positioning paid off over the course of the past year. The team believe countries such as Brazil and industries such as mining will continue to suffer from a reduction in China's demand for natural resources, and the fund remains positioned to reflect this view.
Overall, the fund remains biased towards countries undergoing economic reforms, such as Mexico and the Philippines, and sectors that have tended to be less sensitive to fluctuations in the economic cycle, such as consumer goods, telecoms and utilities. Companies with strong balance sheets, which the team believe are able to sustain generous dividends and generate stable earnings growth, continue to be favoured.
Please note the fund invests in a concentrated number of shares meaning each can significant impact on performance, although it is a higher-risk approach.
Please note the fund's charges can be taken from capital, which can increase the yield but reduce the potential for capital growth.
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