The Newton Global Income fund will maintain its high weighting to defensive mega-cap dividend paying companies, according to manager Nick Clay, who believes the extraordinary policies of central banks will come back to haunt riskier areas of the market. 
The Newton team, led by James Harries and Nick Clay, identify macroeconomic themes and buy companies which they think are set to benefit from them.
Harries and Clay are cautiously positioned, believing that the measures implemented by the world’s central banks since the financial crisis such as ultra-low interest rates and quantitative easing (QE), a form of money printing, have distorted financial markets.
Clay says the measures have forced investors to take increasing levels of risk in order to generate acceptable returns. However, with economic growth still anaemic and debt levels increasing, he says the extraordinary policies have failed.
This view has led the managers to focus on large, stable companies with reliable earnings, well-covered dividends and whose fortunes are not reliant on the performance of the global economy.
““Because of the distorting effect of central bank stimulus, in order to generate a return, investors have been forced to take more risk. We therefore want to make sure that the risks we are forced to take are as limited as possible.” Clay (pictured) said.
“Rather than buy banks and miners where you need lots of things to improve before you can make money, we prefer really strong business that have next to no leverage1.”
An area of the market he thinks fits the bill perfectly is the consumer staples sector and, more specifically, tobacco companies. He and Harries have identified management teams that are good at allocating capital and return any surplus cash to shareholders.
“Thanks to our global based views which identify long-term trends, we have large exposure to less economically sensitive stocks. Companies we like include tobacco stocks Reynolds and Philip Morris, which currently represent around 10 per cent of the portfolio2,” Clay explained.
“They have been incredibly predictable businesses and the management teams have been very good at allocating cash. Yes, there is the declining use of tobacco in the developed world but there is slow but increasing usage in the developing world”
“However, there are just a few international players in the sector therefore their pricing power is very robust.”
“In a world where we think markets are going to be unstable and have become very distorted by policies from central banks, we want to invest in companies which can survive. The likes of Reynolds and Philip Morris are exactly what we are looking for.”
There are some who believe the defensive mega-cap dividend-paying companies that Clay likes are now closely correlated to the outlook for bond markets, fearing they could suffer a correction if they come under pressure from rising interest rates.
Clay admits that if bond yields were to rise substantially his Newton Global income fund could underperform. He says he isn’t particularly worried about that eventuality however, arguing bond yields are unlikely to significantly rise when inflation and growth expectations are so low.
“If bond3 yields4 are going to rise and return to levels we are more accustomed to seeing it will be because the economy has recovered, quantitative easing5 has worked and delivered economic escape. In that scenario, you will want to sell anything that looks like a bond – that is very much the herd view. We think that view is very misplaced,” he said.
“Quantitative easing does not and has not delivered a sustained and accelerating economic recovery. We just don’t see the data to support that argument. I think we are going to live in a low growth and low rate world for some time to come.”
Clay acknowledges that valuations across most equity markets are very expensive, which has made the Newton team very selective about choosing companies with the characteristics he craves.
“The question is, have valuations on a lot of these high quality businesses been pushed up too? This is where having a global focus particularly helps” he explained.
“By being active, we can look to see where the best opportunities are and in the portfolio at the moment we have around 50 company shares6 – which is towards the lower end of our historical range.”
“That is a reflection of the fact that company valuations are not as attractive as they have been in the past.”
The Newton Global Income fund has been one of the best performing funds in the IA Global Equity Income sector since its launch in November 2005.
According to FE Analytics, the fund has returned 127.46 per cent with dividends reinvested over that time as at 15 June 2015. This compares to 88.61 from the IA Global Equity Income sector average and 104.67 per cent from the FTSE World index, which is the fund’s benchmark.
Performance of fund versus sector and index since launch
Source: FE Analytics, bid-to-bid performance with dividends reinvested between 30 November 2005 and 15 June 2015
Clay and Harries’ focus on protecting clients’ wealth has seen the fund significantly outperform during falling markets, such as 2008 and 2011.
The fund has a tendency to underperform when equities perform very strongly, though the team believe maintaining a cautious approach will continue to hold them in good stead over the longer term.
Newton Global High Income is yielding 3.48 per cent as at 15 June 2015.
[1] The use of various financial instruments or borrowed capital to increase the potential return of an investment.
[2] As at 26.05.15
[3] A type of investment under which the borrower/issuer is obliged to make payments of a fixed amount on a fixed schedule
[4] The interest payment received from the bond, usually expressed annually as a percentage based on its cost and its current market value.
[5] An unconventional monetary policy used by central banks to stimulate their economies when standard monetary policy has become ineffective.
[6] As at 26.05.15