Being underweight banks pays off with strong global performances

At first sight, Newton Investment Management’s philosophy seems like a marriage of opposites.

The house is known for its thematic approach: it identifies trends, such as ageing populations in developed economies, and then invests globally in the companies likely to benefit from them.

But it also specialises in equity income, traditionally associated with the narrower universe of UK stocks. At £2.9bn, the flagship Newton Higher Income fund is the fourth-largest retail fund in the IMA UK Equity Income sector.

This double expertise has led to unusual products such as the £153m Asian Income fund, which offers investors exposure to a region known for capital growth, but with an annual payout of over 4 per cent.

Asian Income was launched alongside £375m Global Higher Income in November 2005, when enough non-UK companies had started paying dividends for global income investing to be possible. Since launch, Global Higher Income has grown 45 per cent, placing it in the top decile of the IMA Global Growth sector, which averaged only 20 per cent over the period.

Helena Morrissey, chief executive at Newton, attributes the company’s strong performance across the global range in part to the “credit theme”: the house has been significantly underweight banks – the mainstay of most income investors – throughout the financial crisis.

But global themes and income have not made a perfect match for all the funds. Most notably, Newton Higher Income, which yields 5.4 per cent, has slipped into the third quartile for the three years to 16 June.

Ms Morrissey, who used to head Newton's fixed income team, says: “Some players have more latitude than us when it comes to the yield discipline. We insist yield is 15 per cent above the FTSE All-Share. In momentum markets like the TMT boom that becomes a headwind.”

She says mining stocks are currently riding a similar wave, which Newton Higher Income is missing out on. “If the mining sector continues to do well, that will be a problem,” she adds.

As a result, many investors have left the UK equity income fund in favour of its better-performing younger sister. Indeed, Ms Morrissey says Newton’s thematic approach works best with an unconstrained mandate.

“Emerging markets have been a very big positive theme for us over the last few years. The wider the geographical remit, the more opportunities there are,” she explains.

The rise of global equity is a market-wide trend, as investors realise globalisation is breaking down traditional geographic boundaries. But Ms Morrissey insists Newton does not try to be fashionable.

“Our style is not to find out whether anyone is interested in what we have to offer, but to do something we think we might be good at and hope it will eventually interest someone,” she says.