Fund Manager Briefing: Newton Global Higher Income Fund

Lipper’s Jake Moeller presents highlights of a presentation by James Harries, manager of the Newton Global Higher Income Fund,  March 27, 2014. 

Newton has been something of a leader in developing a comprehensive equity income fund suite. Newton Global Higher Income was among only a handful of comparable funds when it was launched in 2005. Then, Lipper’s Global Equity Income sector didn’t yet exist. Today, there are 29 funds in that sector, of which only four were in existence at the time of the Newton launch.

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Apart from a brief stint at Veritas Asset Management, James Harries has been at Newton for his entire financial services career and is well embedded into the Newton investment infrastructure, sitting within the global equity and real return teams. In addition to his duties on the Global Income fund he is also lead manager of the euro Global Real Return Fund and co-manager of U.K. based Real Return Fund.

Far from being a distraction to the management of the Global Higher Income Fund, his additional duties (he also sits on various internal committees) appear to considerably complement the Newton thematic approach that underpins this portfolio. His knowledge of currency hedging, derivatives, and fixed income is much more prominent than one would expect from a specialist equity manager. Mr. Harries is clearly passionate about equity investing and provides a refreshing, if somewhat cautionary, perspective on current global equity markets.

Table 1. Performance of Newton Global Higher Income, 2009 to April 30, 2014

Source: Lipper for Investment Management.

Mr. Harries likens the current market to the “call of the Sirens” and urges investors to “cover their ears” to the seductive overtones of central bank stimulus and the fallacy of deleveraging (companies have been writing down assets rather than paying off debt). He warns that not only are earnings expectations over-inflated and earnings growth flat, but cheap finance is resulting in a plethora of one-off share buybacks, which although further seducing investors, is actually being used to fund options issues and is not supported by cash flow growth.

Mr. Harries is worried about history repeating itself and is wary of the “we are all okay” complacency that is now afflicting investors. This caution is the basis of his justification for his 2013 relative underperformance: defensive positioning. As the market got ahead of itself on the back of quantitative easing, cash flows and sales had in reality started stalling in the middle of 2012–a signal that many investors appeared to have missed. He is highly critical of consensus estimates for 2014 EPS growth at 14x, when negative preannouncements on the S&P 500 constituents have far exceeded positive ones for the same period (see table 2).

Table 2. S&P 500 Negative & Positive Preannouncements: 5 Year

Source: 3B Corp, Facset Business insider 2013. Reproduced with permission of BNY Mellon.

Mr. Harries is still bracing for a realignment of earnings and growth and a slowing of re-ratings, which in turn will create an environment more conducive to his current portfolio positioning.  He is currently overweight in telecoms and healthcare and is a seller of mining stocks. He remains positive on the U.S. and European regions but is underweighted in Asian markets, with a zero exposure to Japan. He has reduced his exposure to emerging markets down to 6% of the portfolio (it has been as high as 28% in the past) but may increase this if he initiates a more procyclical tilt to his portfolio. His currently favoured stocks include H&M, Adecco, Microsoft, and Dr Pepper.

Table 3. Performance of Newton Global Higher Income in Sector Classification Quartile Bands

Source: Lipper for Investment Management.

It would be remiss of me not to mention the staff movements that have occurred in the team since the departure of Tineke Frikkee in 2013. However, it is reasonable to assume Mr. Harries has been well quarantined from these disruptions. His track record and pedigree is strong and despite the underperformance of 2013, there has been a recent turnaround. His Lipper Leader scores are good across all categories (see Table 4) and a current yield of 3.89% should sate the income appetite of most equity investors.

Table 4. Lipper Leader Scores for Newton Global Higher Income Fund

Source: Lipper for Investment Management.