Higher Education

By resolutely sticking to its investment principles over the years, the Newton Higher Income Fund has grown to become one of the largest UK equity income funds (funds which seek to deliver 10% more dividend income than the FTSE All-Share Index) in the UK. The Fund, which is aimed at those investors who need to generate an income from their savings along with some level of capital growth, remains in the top 10% in its sector over 1,3, 5 and 10 years for income distribution¹ and offered a historic yield of 7.2%² as at the end of September 2010.

Over the years, investment fads have come and gone. At times, these fads have seen the Newton Higher Income Fund underperform more 'racy' fund offerings over the short term. But, by never straying from its original objective of consistently delivering one of the highest levels of equity income around, the Fund's longer-term performance is amongst the best in the industry. This is because every investment cycle eventually reaches a point when stock market investors lose confidence in more risky areas and begin to focus once more on safer, more 'defensive' companies.

Past performance is not a guide to the future however, and it is important to note that the value of your investment may fall as well as rise.

Source: Lipper as at 30 September 2010. Total return 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. The value of shares and income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested.

Like all funds managed by Newton, the Newton Higher Income Fund draws upon the global thematic investment process that drives all of Newton's fund range. The Fund employs a strict yield discipline which requires that only those UK stocks offering a 15% premium to the yield on the FTSE All-Share Index are considered for purchase. When a share's yield declines to below market levels, either through strong price performance or because of a reduced dividend, it is sold. This strict discipline means that the Fund can book the profits on a strongly performing share, even though competing funds may be restrained from doing so due to their need to follow a stock market index such as the FTSE All-Share Index.

This dynamism allows the Fund's manager to quickly recycle such profits into the latest thematic investment ideas generated by Newton's team of analysts.

As Tineke Frikkee, the Fund's long-standing manager, explains, “The enduring strength of equity income funds is that whatever may happen to share prices, the dividends they pay are always positive. Additionally, as many companies in which we invest aim to increase or preserve the level of their dividend payout on a year-on-year basis, the Newton Higher Income Fund has received a strong and rising level of income from its portfolio of investments over time. Our focus has allowed us to increase the dividends we pay to investors in each of the last 14 years, including 2009, and this was despite some of the most difficult conditions we've seen in a generation,” she says.

The Newton Higher Income Fund, which pays dividends every quarter, went 'ex-dividend' on 30th September 2009. This means that anyone invested in the Fund by this date received a dividend payment at the end of November; the other three payments are made at the end of February, May and August.

The Fund delivered a quarterly dividend of 0.9p to the end of September 2010, helping to counter the general consensus that equity income funds would struggle to maintain their dividend levels in the current market climate. According to Frikkee, the portfolio remains on track to deliver 3% annual dividend growth in the year to the end of June 2011, maintaining its excellent record of growing its income for the past 15 consecutive years. “This contrasts markedly with the 10% decline in UK market dividends paid during 2008 and our previous forecast of a 10% decline in UK market dividends in 2009,” she says.

Commenting on the formula behind the Newton Higher Income Fund's record, Frikkee says, “We believe our ability to continue to grow our distributions in these more challenging times stems from the convergence of Newton's global thematic investment approach and our strict dividend yield discipline.

“Newton's 'debt & credit' theme and its successor 'all change' steered us clear of the banking sector along with other sectors that typically have high levels of borrowing such as property and pubs. Evidently these were, and continue to be, the areas at the epicentre of dividend cuts, which we have largely avoided.” She adds, “As such, we do not have the same number of large dividend gaps to fill as some other income funds. Our strict dividend yield discipline factors in future dividend payments rather than historic payments and, as a result, highlights those stocks which we should avoid owing to unsustainable dividend yields. That said, there continue to be many high quality UK companies which offer attractive and sustainable dividend yields.”

Looking further afield, Frikkee explains that, “Newton's 'all change' theme continues to point to an extended period of relatively low UK equity returns and, within this, we believe that sustainable high yields and real dividend growth will be central to long-term total returns.”

It is worth remembering that dividend yield level is not guaranteed and equity income investing is not suitable for everyone's investment objectives; please see your Financial Adviser if you are unsure what type of investment is right for you.

Yield - The estimated rate of income that will be paid by a company on its shares. A share's yield is calculated by dividing the dividend by the current share price. Yields are expressed as a percentage of the current price. For example, a share with a current price of 300p and an annual dividend of 12p has a current yield of 4% (i.e. 12 / 300 = 4%).

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.

¹ Source: Lipper 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.

² Source: 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. Due to the calculation method, at times yields may be high and rising as a result of a falling share price, i.e. capital depreciation on your assets, and not a rising dividend. Historic yields are not indicative of future yields. It should be noted that a steady and rising income received from an investment is what really matters with the opportunity to grow capital over the long term. Therefore, steadily growing dividend payouts, rather than the historic yield, may serve as a better indicator of the actual health of the underlying investment. Please remember that past performance is not a guide to future performance. Dividend income is not guaranteed and may fall as well as rise due to stock and currency movements.