Newton’s ongoing struggle to turn around its £2bn Higher Income fund has taken a blow as it was ranked high in the list of underperforming funds in Sanlam’s latest Income Study.
The report claimed the Higher Income fund – the largest on the list in terms of assets and which has gone through two manager changes and a strategy overhaul in recent years – has consistently underperformed its peers.
The fund ranked in the bottom quartile of the IMA UK Equity Income sector for performance in the past one, three and five years, according to data from FE Analytics.
Newton overhauled the strategy on the fund when Richard Wilmot took it on from Tineke Frikkee in December 2012, scrapping a requirement to deliver a yield in the top 10 per cent of the IMA UK Equity Income sector and making more use of the ability to invest in overseas companies.
Ms Frikkee told Investment Adviser last year the poor performance was due to the fund being restricted to only owning stocks that had a yield of more than the FTSE All-Share index, as well as being restricted by the fund’s size, which had been as big as £3bn.
Earlier this year, Mr Wilmot stepped back from running the fund, handing it over to Christopher Metcalfe to concentrate on heading up Newton’s UK equity desk.
Paul Surguy, head of managed funds at Sanlam and the author of the report, said it was concerning there was still so much money in the fund in spite of the underperformance and the mandate change.
“I understand the reasons for the change – they thought they were chasing income too much,” Mr Surguy said.
“But investors bought it for the income and that is what they want, but that is not necessarily what they will get.”
Newton failed to respond to requests for comment.
The biannual Income Study ranks UK Equity Income funds based on performance, volatility and income delivered in the past five years, dividing the funds into a ‘white list’ of top performing funds, a ‘black list’ of underperforming ones and a ‘grey list’ for funds in between.
Joining the Newton fund in the black list in this latest report were the JPM UK Higher Income fund and the F&C UK Equity Income fund.
The F&C fund had struggled for many years but Rodger McNair and Michael Ulrich were appointed as co-managers at the start of this year and told Investment Adviser they had “substantially” realigned the portfolio.
JPMorgan’s Nick Wilcox said the group’s UK Higher Income fund had strong risk-adjusted returns, but added the fund had missed out compared to peers in recent years because other funds had loaded up on risky small and mid-cap stocks.
A large number of funds have dropped out of the study since its last iteration in January.
This is mainly due to several funds leaving the sector, having failed to reach the yield requirements imposed by the IMA.
Dividend growth slows as sterling’s strength weighs on payouts
The reduction in the size of the Sanlam study highlights the fact that high income payouts from equities are becoming harder to find.
Several funds have dropped out of the IMA UK Equity Income sector as the dividends from the shares they own have not matched the rise in share price, leading to a drop in the fund’s percentage yield.
The latest Capita Dividend Monitor report has found that the underlying year-on-year growth in dividends was 1.2 per cent in the second quarter of 2014, the slowest since BP cut its dividend in 2011.
The slow growth came because the top 15 largest dividend-paying companies, which make up 61 per cent of all dividends paid out in the UK, saw their payouts fall by 0.8 per cent.
The drop was largely due to the strength of the UK currency, especially compared with the dollar, as many of the largest UK-listed companies denominate both earnings and dividends in dollars.
This means that while some companies raised their dividend in dollar terms, the strength of sterling led to an effective dividend cut for UK investors.
Outside the top 15 companies, dividend payouts grew by 4.4 per cent, which Capita said was “still sluggish by historic standards”.
Capita said the “ongoing strengthening of the pound and slower earnings momentum” has led it to downgrade its dividend expectations for the year.
