Newton’s Richard Wilmot has laid out plans to further cut the income target on the group’s £2.2bn Higher Income fund after its previous manager Tineke Frikkee was removed from the product.
Mr Wilmot said he would drastically lower the minimum yield required for stocks to enter the portfolio and make greater use of its ability to invest in overseas companies, increasing the fund’s investment universe significantly.
The Higher Income fund will no longer aim to post a yield in the top 10 per cent of the IMA UK Equity Income sector, instead targeting a yield of 110 per cent of the FTSE All-Share index’s average yield – in line with the sector’s minimum requirement.
The move comes as part of a long process of attempting to improve the performance of the fund, which saw the group at the fund’s income requirement under Ms Frikkee.
In September 2010, she said future payouts would be “more realistic”, and would likely be 20-25 per cent lower than the previous 12 months when the fund yielded 8 per cent.
But Mr Wilmot has gone a step further and under his yield requirements companies qualify for his buy list if they yield just 75 per cent of the market average, and are sold if their yield falls below 50 per cent of the average.
“In the current environment it can be much more challenging for a company yielding more than 5 per cent,” he said. “It is much more likely to see a dividend cut at this level, and there is often no sales or capital growth.”
As part of the latest overhaul, which began this month, Mr Wilmot will scrap the use of covered calls, which had previously been used to boost the fund’s yield, and will aim to reduce the fund’s stock-specific risk by reducing the amount invested in the top 10 holdings from more than 50 per cent to roughly 30-35 per cent.
The moves are also aimed at bringing the Higher Income fund into line with Newton’s other equity income funds, including Jason Pidcock’s Asian Income fund and James Harries’s Global Higher Income fund, which both have a lower yield than the UK fund but have posted top-quartile returns in their respective sectors in a five-year period.
When ranked by the level of payouts to investors the Newton Higher Income fund had been in the top quartile of the IMA UK Equity Income sector for each of the past seven years, but its performance has fallen to the bottom quartile of the sector in both one and three-year periods to February 5 according to FE Analytics. Mr Wilmot said: “We’re looking for a level of income which also allows a reasonable level of capital growth. It is important not to be too greedy with income if it does not enable any capital growth.”
The manager added investors had been receptive to the changes so far and the fund had seen inflows since he took over.
