Though markets have rallied over the last few years as investors became more comfortable taking risk, James Harries’ £4.25bn Newton Global Higher Income fund has lagged its sector and benchmark as the manager has become increasingly concerned about the outlook for risk assets.
However Willis, head of research at Whitechurch, says investors would be wrong to avoid, or sell, the underperforming fund because Harries’ primary focus is on capital preservation and he is positioned to shelter his investors in the event of a sell-off.“Most funds will underperform because their style is out of favour. If the manager is willing to communicate the reasons behind their positioning, we are happy to hold onto a fund even if we sometimes disagree with their view,” Willis (pictured) said.
“One example is Newton Global Higher Income. The manager has set out his stall on the current market and while we don’t wholly agree with it, we appreciate that our view could be wrong and so we want a fund that can give us protection.”
Harries has managed the Newton Global Higher Income fund since its launch in November 2005.
Though it has a strong long-term track record, our data shows the fund was a bottom quartile performer last year and is currently down against the IMA Global Equity Income sector and its benchmark – the FTSE World Index – in 2014.
Performance of fund vs sector and index since Jan 2013
Source: FE Analytics
This hasn’t been an issue for Willis, however. A number of experts, such as FE Alpha Manager Marcus Brookes, have warned that as the market is becoming increasingly consensual, there is a lack of genuinely bearish equity managers.
Willis says Harries is one manager who will go against the grain. Though he fully expects the fund to lag behind during strongly rising markets, he says it comes into its own during times of market stress because of the bearish view on global markets held by the manager and his deputy Nick Clay.
“They are quite convinced that the huge amount of stimulus that has been provided by the world’s central banks hasn’t really changed anything,” Willis said.
“All they think it has done has inflated the price of equities as QE has forced investors into risk assets. In terms of the actual economy, it has done very little as it hasn’t made the man of the street any richer, just the top 1 per cent of society.”
Harries told FE Trustnet earlier this year that there were a number of reasons why he and his team are bearish at the moment, such as huge amounts of debt in the system, high starting valuations, poor demographics and major distortions in the market due to central bank intervention.
Harries (pictured) is therefore keeping a very defensive portfolio.
His three largest sector weightings are consumer products, telecoms and healthcare and his top 10 holdings include global mega-cap dividend paying stocks such Microsoft, GlaxoSmithKline, Novartis, Roche and Philip Morris International.Harries has a good track record of defending capital in the past.
According to FE Analytics, Newton Global Higher was a top quartile performer and beat its benchmark in the crash year of 2008. And in 2011, when the eurozone crises escalated and appetite for risk fell considerably, the fund made 2.56 per cent while the sector and index lost money.
Though the fund has struggled of late, Harries’ focus on downside protection has contributed to Newton Global Higher Income being the sector’s second best performing portfolio since its launch in November 2005.
Our data shows it has returned 105.72 per cent over that time, beating the FTSE All World Index by more than 25 percentage points.
Performance of fund vs sector and index since Nov 2005
Source: FE Analytics
Harries is a popular manager with industry experts and fund researchers.
Newton Global Higher Income sits on the FE Select 100 and Amandine Thierree, analyst at FE Research, says it suits investors who are willing to invest for at least seven years, are looking for a source of income and want to limit their exposure to falling markets.
It also features in Square Mile’s Academy of Funds due to Harries’ disciplined approach to running money which includes a bias towards good quality, cash generative companies that provide reliable dividends.
“The fund is constructed using strict yield criteria,” Square Mile said.
“Every holding in the fund must have a yield that is at least 25 per cent greater than the FTSE World Index at the point of purchase. If a holding's prospective yield falls below this premium to the index, it will be sold.”
“While the manager is focused on higher yielding stocks, he has a strong valuation focus looking for what he believes are reasonably priced companies that have a competitive advantage and sound fundamentals.”
One of the major reasons why Willis is happy to back the fund is because he blends Harries’ thematic and defensive style with Jacob de Tusc-Lec’s Artemis Global Income fund.
He says that by combining the two, investors can be protected during falling markets by the Newton fund and can take advantage of rising ones with the five crown-rated Artemis fund.
De Tusch-Lec’s fund has been the best performing portfolio in the IMA Global Equity Income sector since its launch in July 2010 with returns of 77.89 per cent and has beaten its MSCI AC World benchmark by more than 30 percentage points.
Performance of fund vs sector and index since July 2010
Source: FE Analytics
While Harries offers large-cap exposure, De Tusch-Lec has been upping his exposure to mid-caps as he says they will be the best performing asset class when the likes of the Fed eventually tighten monetary policy.
Newton Global Higher Income yields 3.82 per cent and has an ongoing charges figure (OCF) of 0.8 per cent. Artemis Global Income, on the other hand, has an OCF of 0.87 per cent and yields 3.8 per cent.
