Going global

The Newton Global Higher Income Fund was created to capture the most attractive company dividend opportunities wherever they might arise in the world. The Fund represents a marriage of two of Newton's long-standing investment strengths. One is its expertise in managing equity income funds; the other is its excellent track record in managing global equity portfolios.

The Fund has the flexibility to invest in any global market, without the need to mirror the FTSE World Index. Like all funds managed by Newton, its investment approach is underpinned by Newton's unique global thematic investment process.

While some investment approaches rely heavily on following the direction of the market or on individual manager views, Newton's global thematic investment process encourages its fund managers and analysts to identify the main drivers, and the main threats, to financial markets. Its global themes encompass ideas which range from today's growing environmental pressures to the move we are seeing from a world where it has been overly easy to borrow money to one where credit is very difficult to come by.

Equity income funds traditionally seek to deliver both growth and a regular rising income from portfolios that emphasise companies with high dividends. Until recently, funds of this type tended to focus on the UK stock market as British companies had historically offered far higher levels of dividend than their overseas counterparts.

But recent years have seen the level of dividend yield in overseas markets dramatically improve owing to a number of factors. The most prevalent has been the concerted efforts made by companies in such markets to attract a wider investment audience by offering dividends, as well as the potential for capital gains. Today's low interest rate environment and increasingly ageing global populations also help to maintain an ever growing constituency for real income (yield) generating assets.

Yield is the income return on an investment. It is expressed as a percentage and is calculated by dividing the dividend that a share pays by the share's current price. For example, a share with a current price of 300p and an annual dividend of 12p has a current yield of 4% (ie 12/300 = 4%).

Newton spotted this opportunity very early and became one of the first UK fund managers to offer a truly global equity income fund, with levels of yield that were much in line with more mainstream UK equity income funds. This means that the Fund can help UK equity income investors to diversify their investments across a broad spread of global markets, reducing their reliance thereby on the prospects of a single stock market.

The Newton Global Higher Income Fund employs the same sort of strict yield criteria as its flagship Newton Higher Income Fund. The latter celebrated its 23rd birthday in June 201009 and throughout its long life has consistently offered one of the very highest levels of income for a fund of its type¹. It's partly this consistency of approach and objective that has helped the Newton Higher Income Fund to well past £2 billion in size today².

By applying Newton's thematic approach alongside its yield discipline, the Newton Global Higher Income Fund has set new standards in the IMA Global Growth sector, while offering UK investors a genuine opportunity to diversify their income investments away from being so reliant on the UK market. Although we expect sterling to remain weak over time, its appreciation against global currencies may erode the value of investments.

The Fund's approach leads to investment in companies that are thematically attractive, have sound fundamentals and which offer a substantial yield. For inclusion in the Fund's portfolio a company's shares must offer a prospective yield that is 25% higher than that of the FTSE World Index.

Should a share's yield decline to market levels, either through strong price performance or because of a reduced dividend, it will be sold. This enables the Fund to take the profits on a strongly rising stock and to reinvest the proceeds into the latest thematic ideas being generated by Newton's extensive team of company analysts. With interest rates in the western world already at historic lows, this yield discipline should be highly attractive to a wide range of private investors.

As James Harries, the manager of the Newton Global Higher Income Fund explains, “Part of the Fund's appeal for UK equity income investors is that it offers true geographic diversification with only around 10% of the Fund currently allocated to sterling assets.

“Because a stock's yield is the key determinant for us,” he says, “the US market, where yields are generally far lower, only accounts for around 26% of the Fund's allocation, despite North America accounting for around 50% of the world's listed companies; Japan is another example. The remainder is currently shared between a 29% holding in euro-denominated assets, 20% in Asian holdings and around 5% in Latin America³." Of course, our portfolio holdings may change at any time as our investment ideas develop.

Maintaining a high level of yield in the portfolio has also delivered other benefits. “The bottom line,” says Harries, “is that yield often fluctuates far less than growth. This is because any attempt by a company to reduce the level of dividend it pays is usually seen as a serious warning sign by investors. This has been reflected in the consistency of the Fund's returns,” he says. “Because the Fund currently yields 5.2%⁴ it may withstand fluctuations in the stock markets better than its purely growth-oriented peers.

“Given the economic environment which we find ourselves in,” says Harries, “we continue to favour robust well-financed businesses which we see as relatively insensitive to changes in the global economy. Unlike some fund managers, we won't be repositioning the Fund towards more typical global 'growth' sectors. Huge levels of debt are still floating around the system like icebergs. Inevitably,” he says, we believe “these will sink many of the areas that are currently most favoured by some equity income funds.

“The sort of companies we are most interested in now look very attractive on an absolute basis, while their recent underperformance has provided us with another opportunity to increase our holdings. This has seen us continuing to build overweight positions in more defensive industry sectors such as telecommunications - by far our biggest sector bet - and healthcare. However, this 'defensive' bias is more than compensated for by our exposure to more cyclical, fundamentally attractive markets such as those of Asia and Latin America.”

Even so, it's worth remembering that, like all funds within the IMA Global Growth sector, the Newton Global Higher Income Fund invests primarily in shares so your capital is not guaranteed and may fall as well as rise. In addition, yield is not a guide to investment performance; firms may continue to pay dividends while their share price is falling.

Investing in equity income funds may not meet all investment objectives and is not without risks. For example, the Newton Global Higher Income Fund invests in overseas shares which pay their dividends in foreign currencies, so changes in the rates of exchange may affect the value of the investments.

For further information on the Newton Global Higher Income Fund please read the Simplified Prospectus. If you are unsure which type of investment is right for you, you should discuss your particular financial needs with an Independent Financial Adviser.

Source: Lipper as at 30 September 2010. Total return including income net of UK tax and annual charges, but excluding initial charge. All figures are in sterling terms. The impact of the initial charge, which may be up to 4%, can be material on the performance of your investment. Performance figures including the initial charge are available upon request. Past performance is not a guide to future performance.

When investing, it is important to understand that all investments carry a degree of risk - some more than others. Here we explain the nature of risk in investing and introduce the risk & return ratings for BNY Mellon Investment Funds. These include indicators of the suitability of our funds for different types of investors.

¹Lipper as at 30 September 2010. Fund performance calculated as total return including income net of UK tax and annual charges, but excluding initial charge. All figures are in GBP terms. The impact of the initial charge, which may be up to 4%, can be material on the performance of your investment. Performance figures including the initial charge are available upon request. Past performance is not a guide to future performance.
²Source: Newton. Fund size £ 2,751.35 billion as at 30 September 2010
³Source: Newton. as at 30 September 2010
⁴Newton/ Lipper as at 30 September 2010. The yield figure is calculated on the basis of dividing the last 12 months dividends by the current price. Current yields are not indicative of future yields.