The £4.12bn fund is the most popular in the IMA Global Equity Income sector, according to FE data, but has performed poorly over the past year, producing bottom-quartile returns.
Over one year it has made just 14.75 per cent while the average fund in the sector has returned 20.72 per cent. The fund’s chosen benchmark has done even better, the FTSE World Equity Index rising 23.32 per cent.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
The fund, managed by James Harries with Nick Clay, is still marginally ahead of its sector over three years, returning 34.98 per cent compared with 34.53 per cent for the average fund. This puts it in the second quartile, but its poor performance over the past 12 months has dragged it down.
Over five years its record still looks good, having made 111.05 per cent in total to the 100.57 per cent of the sector average, the third-best result of the 12 constituents.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It still remains far and away the most popular fund in its field, taking in approximately £660m over the past year, with the next most popular fund, Threadneedle Global Equity Income, receiving just £339m.
Amandine Thierree, analyst at FE Research, says that the fund’s poor performance stems from its cautious positioning in a time of rising markets.
The fund aims to outperform in falling markets and is largely set up to that end, she explains.
Data from FE Analytics shows that the fund produced top-quartile returns in 2008 (although the sector contained only 11 funds at the earlier date).
In 2011 it made 2.54 per cent while the average fund in the 20-strong sector lost 2.06 per cent.
Performance of fund vs sector and benchmark since 2008
| Name | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 |
|---|---|---|---|---|---|---|
| FTSE World Index | 21.11 | 11.83 | -5.79 | 16.28 | 19.64 | -18.18 |
| IMA Global Equity Income | 19.99 | 9.74 | -2.06 | 14.3 | 17.37 | -18.42 |
| Newton - Global Higher Income | 15.17 | 10.33 | 2.54 | 13.31 | 17.71 | -16.94 |
Source: FE Analytics
However, the fund’s underperformance this year has been more than it has experienced in previous rallies.
Thierree (pictured) explains that the managers have deliberately remained in more cautious sectors, which has hindered performance."The managers told me they are deliberately low beta as they believe there is still too much uncertainty in the markets," she said.
"Don’t forget that the fund’s objective is to outperform in falling markets, but I agree that its performance year-to-date is a bit poor compared with the sector."
"Exposure to financials has been reduced [in the fund] over the past months while it has increased for the Global Equity Income sector. Financials performed very well in July and September."
"The consumer goods names (in which the fund has built strong positions and is overweight) have also been detrimental as they are characterised by slow growth."
"Overall, I would say it is reflective of their cautious stance. A major theme is still the avoidance of everything related to debt and they think the world has not done enough in that direction."
Thierree explains that this is reflected in the fund’s geographical distribution. The managers are avoiding China as they believe the debt issue there is severe.
On the other hand they are more positive on the US and its currency, a position that has again hindered performance over the past year.
"They are positive on the US and some of their holdings are hedged against the USD," she said.
"Given its poor performance in the third quarter of 2013, this might have had some impact on the performance, but this doesn’t explain the 6 per cent underperformance year-to-date."
The fund has 40.1 per cent allocated to the US, with a further 31.7 per cent in Europe ex UK. The UK makes up 12.8 per cent of the fund while emerging markets are around the same.
The American bias is reflected in the fund’s largest holdings: by size the first three are Reynolds American, Philip Morris and Microsoft.
It is overweight the defensive telecommunications sector, with 10 per cent in that area, and is overweight healthcare and utilities as well.
Financials and basic materials are the fund’s largest underweights, unsurprising given the cyclical, aggressive nature of those industries.
It has to be remembered that cyclical areas have outperformed defensive ones over the last year.
This has hurt the fund relative to its FTSE World index, although cannot explain the underperformance compared with the sector.
Thierree suggests the latter is down to the managers remaining more cautious than their peers and refusing to hunt for yield in more risky areas of the market.
However, Harries and Clay are conscious of their underperformance and have been taking steps to try to mitigate this.
"In November last year, the team was already conscious about lagging performance so they cashed in profits in some of the big names and redeployed the money," she said.
"But their views about how the world is working and how it needs to change are still the same and they are comfortable with the portfolio (it has not changed much for a while): cash yields nothing so there is no point holding cash, and market rallies are short-term."
The analyst says she is not concerned by the recent underperformance of the fund which is in line with its cautious nature and income mandate. For the income, she still thinks it is a good option.
"I’d say that is still a good fund to hold and don’t forget that it’s an income fund, so in that regard I will always expect it to have a cautious component as it needs stability," she said.
"As for the income distributed, the historic yield currently stands at 4.29 per cent which is more than reasonable from my point of view."
Newton Global Higher Income requires a minimum initial investment of £1,000 and has ongoing charges of 1.13 per cent.