Nick Clay took over as lead manager of the £4.5bn Newton Global Income fund in December last year following James Harries’ departure after 10 years at the helm.
Mr Clay explains his team’s approach has not resulted in any changes to either the portfolio’s aim or investment process. The objective is to generate “a good total return over a sensible period of time, and we do that by focusing upon the income part of the total return”, he says.
The manager uses “global themes” identified by Newton Investment Management to help find companies with sustainable and growing dividends. He notes these themes offer him some perspective on what the main investment drivers will be in the next three to five years.
“Where are we likely to get [those investment themes] as tailwinds, and where equally in today’s world are they likely to be headwinds? Then of course we talk about the fundamentals of the company and the valuation. That is down to our global analyst team to find firms with the right fundamentals given the focus the themes have presented us with,” he adds.
Mr Clay highlights the repositioning of the Chinese economy as one theme to avoid. “That is a messy process, in a lower-growth environment, which has a big impact on many industries, countries and currencies that have built up structures to serve the old Chinese economy – and so we want to avoid all of those.”
He also identifies the debt burden and state intervention as other reasons for shying away. Instead, one of the most influential themes in the portfolio at present is what the manager refers to as “havens”. As a result the fund has no exposure to mining or banking stocks, while being overweight to tobacco companies, utilities firms and healthcare stocks.
In early 2015 Mr Clay took advantage of the bounce in European markets to sell his European holdings, using the funds to purchase US-domiciled businesses. “We have continued to buy things like McDonald’s, Western Union and Procter & Gamble, to the point that we have moved overweight US equities for the first time in 10 years in this strategy, and it also means we have no emerging markets exposure,” he says.
The fund’s clean fee W-share class has an ongoing charge of 0.8 per cent, while the fund is at level five out of seven on a risk-reward scale.
This process has seen the fund realise periods of outperformance against its benchmark and peer group. Over 10 years to February 4 2016 it delivered an impressive 124.6 per cent, while the Investment Association Global Equity Income sector average was 69.3 per cent and the FTSE World index rose 86.1 per cent, data from FE Analytics shows.
In the past 12 months the portfolio has generated a return of 4.7 per cent, while the index and sector have both recorded losses.
Mr Clay calls the fund’s performance last year “typical”. He explains: “The first part of 2015 it struggled, with markets in buoyant mood because of the quantitative easing in Europe, and the consensus view coming out of the US [that] we were on the cusp of an economic recovery.
“We do not think there is an economic recovery on the horizon, we think we’re going into a global slowdown. Therefore we have positioned the fund in those companies that are more defensive and less economically cyclical.” Consequently the portfolio outperformed when concerns about China and emerging markets surfaced in July last year.
The manager believes “safe haven” stocks, such as McDonald’s and Reynolds American, are “doing exactly what we’re investing in them for in order to deliver for our clients”.
Meanwhile Mr Clay’s rather bearish, or “realistic”, global economic outlook sees him predict that Janet Yellen will backtrack on her decision to tighten monetary policy.
“We think there will be a policy reverse in the US, that the interest rate will be cut back down to zero again and that it is much more likely we will end up with QE4 this year than a rate-rising environment,” he says.
EXPERT VIEW
Ryan Hughes, fund manager, Apollo Multi Asset Management
This is a fund I know well having been invested with my own money for the past 10 years. Despite suffering a recent manager change, Nick Clay has been deputy manager on the fund for a long time and is therefore known to many investors and causes me no concerns. The Newton approach of focusing on quality companies that are cash generative and therefore have an ability to consistently pay a dividend is one that has worked in times of equity market volatility, and I see this fund’s approach continuing to work well.
