Tineke Frikkee’s vehicle will still aim to remain in the top 10 per cent of dividend payers in IMA UK Equity Income, but it is set to lose its status as the second highest yielding fund in the entire sector. According to FE data, the fund has a one year historic yield of 7.15 per cent. Only Insight UK Equity Income Booster is yielding more than this figure.
The news comes just a day after FE Trustnet revealed that the vast majority of high-yielding UK Equity Income funds underperform their sector in the medium and long term.
An FE Alpha Manager who wished to remain nameless said that funds like Newton Higher Income – which has returned less than the FTSE All Share benchmark over three and five years – are forced to sacrifice capital gains just so that they can afford to pay out their dividend.
Performance of funds versus sector and benchmark
Source: FE Analytics
"A healthy portfolio should generate an above average yield that can grow year-on-year, but income should not have a negative effect on capital return," said the manager.
"With the FTSE All Share yielding 3.5 per cent, I would argue that any fund yielding more than 5 per cent is pushing the income account very hard and seriously risking the conversion of capital to income."
The question now is whether a 20-25 per cent cut is enough, as Newton Higher Income will still be yielding around 5.5 per cent.
However, Frikkee is confident the dividend has been cut to an appropriate level.
"After careful deliberation and modelling, we are confident that the revised dividend distribution will get the fund to a sustainable level of dividend yield from our portfolio of stocks," she said.
Chief investment officer at Newton Jeff Munroe says the US Federal Reserve's plan to hold interest rates at near zero through to mid-2013 was one of the main reasons why the dividend was cut.
"The Fed’s decision reflects the deleveraging and low growth environment that the developed world is experiencing," he said. "Companies will therefore find it more difficult to provide dividend payments in line with those they were able to deliver during periods of strong global economic growth."
"In this environment, supporting the current dividend level would increasingly affect the Newton Higher Income fund's overall return to investors. The change will give us increased flexibility to invest across the spectrum of UK equities."
In separate news, Newton has announced that its Newton UK Equity and Newton Growth funds will be merged into the Newton Income fund.
The newly merged £1.3bn vehicle has been renamed the Newton UK Equity fund, and will be managed by Richard Wilmot.
According to FE Analytics, Wilmot has returned 5.81 per cent in the last five years, underperforming his peer group composite by 14.11 per cent.
Performance of manager versus peer group
Source: FE Analytics
Newton UK Equity will focus on delivering long term capital growth with some income through a portfolio of approximately 100 UK stocks.