the manager of the newton higher income fund seeks out stocks that are yielding 15% more than the All-share index
Clive Beagles was a relatively unknown name in fund management when he took over the Newton Higher Income fund from Toby Thompson, now at New Star, on 2 July 2001.
He was previously the alternative manager on the £700m, AA-rated fund for the five years before being appointed lead manager. In running the fund, Beagles continues to apply strict yield criteria in his stock selection.
The fund has an estimated net yield of 5.3% and fees are taken from income. Since Beagles took over in July 2001, Newton Higher Income is ranked eight out of 76 funds in the UK All Companies sector to 14 April. Over that period, the fund lost investors 21.17%, after charges, compared with the sector average loss of 28.39%, according to Standard & Poor's.
How do the yield criteria on the fund work?
I look for stocks that are yielding 15% more than the All-Share. As soon as the yield falls to equivalent or below that of the market, it will be automatically sold. There are no exceptions.
In a perfect world, all stocks that we own rise in value. As a result, the yield falls, and at the point which it no longer yields more than the market we will then crystallise our gain and move on to something else.
Will you hold any stock that offers that yield premium or do the companies also have to exhibit other qualities?
At any one time, there are probably 150-160 stocks in the market that feature the 15% yield premium.
Obviously, I do not hold them all. I look for companies with potential for good dividend growth.
Companies must also have good management and a strong market position.
How does a stock get into your portfolio?
About 90% of stocks in the fund have been ideas generated from our research team of 18 global industry analysts. This team first comes up with the ideas, and we then overlay the yield screen.
Do you have index risk constraints?
No formal index risk constraints are in place. There is no requirement to hold exposure to stocks that I do not like. For example, there is no Vodafone in the fund, there is no GlaxoSmithKline and only a minor holding in BP.
In terms of overweight positions, there is nothing formal, but I do have informal limits in the levels of active risk that I will take.
Likewise, there are no constraints at the sector level. We know what our tracking errors are but don't really run the fund around them.
How does Newton's thematic approach affect the stock selection?
Although my process is primarily bottom up, I do follow global house themes.
One of Newton's themes, for example, is growth in Asia and China. This is nothing really new. A lot of people have been banging on about China and Asia for several years.
This theme is apparent in the stocks I own. I have, for example, 20% of the fund invested in banks but about half of that weighting is in HSBC and Standard Chartered. HSBC represents 7.5% of the fund and is my single largest holding. There is 3.5% in Standard Chartered. This large weighting toward Asian-biased banks is based on the fact they are biased toward much less mature markets.
We believe there are huge growth opportunities in Asia and China, for example. Compare that with the immense margin pressure and scrapping over every last customer in the domestic banks, and it's a very different world.
What is interesting, however, is that many commentators would think that an equity income fund would want to own the cheapest, highest yielding name. That is not what I want to do.
What I am trying to do is own stocks that yield more than the market, but which are also going to give us medium growth potential.
HSBC and Standard Chartered are an excellent example of that.
While they may trade on a modest premium relative to some of the more domestically- oriented stocks, this is more than justified relative to their medium-term prospects.
What other themes are evident?
Another theme is embracing Economic Value Added principles by some of the basic material industries.
These companies used to be run to become the biggest or become number one in market share. Now, they are aiming to manage their capacity more efficiently to achieve better pricing.
This is providing opportunities in the mining and building materials sectors. They are no longer trying to become the biggest but they are trying to improve their returns on capital invested.
Are there any fundamental differences in the way the fund is managed now and when it was run by Toby Thompson?
One difference nowadays is that the fund is all pure equities. Three years ago there were some convertibles in the fund. I believe if you are buying convertibles in growth companies you are ruining the discipline.
The number of holdings has reduced marginally as well. There are 60 companies now, whereas there used to be closer to 70. This has probably not been that deliberate, but it is a number I am comfortable with.
What market capitalisation do you favour?
The yield requirement will naturally push us toward mid-cap stocks. The traditionally low yielding sectors such as pharmaceuticals and telecoms don't tend to be found in the mid-250. At the moment, our fund is slightly more than 60% FTSE 100 and 40% mid-caps. We don't own anything below the 250 for liquidity reasons, and we are happy to be lightly weighted, particularly in the mega-cap end of the FTSE 100 index.
Do you increase the rate of turnover in the portfolio during volatile markets?
I am trading a bit more with the current volatility. The turnover is not that high. It looks like it is running at about 50% on a 12-month basis at the moment.
What sectors have ended up being most overweight?
The contrarian nature of the fund means that at any one stage there will be big overweight sector bets in sectors that currently look dangerous or unfashionable. One example is general retailers. No one wants to own these because the consumer environment is obviously tightening and getting tougher. We are not tremendously upbeat but we believe it will slow instead of collapse.
There is a raft of stocks you can buy in this sector on very low multiples. These include stocks such as Gus on a P/E of nine and a yield of 5%, and Debenhams is on a P/E of seven and yield of 5.5%.
Although we believe things will get tougher, the rating you can purchase those stocks on today looks like it adequately allows for that but you are playing against momentum in that environment at the moment.
You will not find heavy sector weightings in our fund that you might in other equity income funds, such as utilities and tobacco.
We do own stocks there but we have taken profits over the past 18 months. We have recycled that into some of these more economically sensitive areas of the market.
Besides the banking stocks, what other key active positions do you have?
P&O is a stock I have been adding to recently. Many people consider P&O to be an unfocused conglomerate with high debt and pension funding problems.
Some of that criticism is right but P&O trades on a 40% discount to its asset value and its biggest business is ports operations focused on China and India.
If the amount of inward investment to China by the US and the rest of the world is to be at all fruitful, those products have to find their way back to the West in some shape or form, and that is going to have to happen through the sorts of ports and networks P&O has established.
Some people might think I only own it because it is high yielding and because it is on a discount to NAV and is a cheap grubby stock but this is not the case. I like it from the Asian angle, as Asia is a dominant theme.
Another is Rexam, the packaging company. This business is very well managed. It predominantly manufactures beverage cans. It is a good example of one of these more basic type companies that is being run very sensibly. The number of competitors has consolidated down and pricing has improved.
FUND MANAGER: Clive Beagles
Clive Beagles joined Newton in 1996 as a specialist fund manager of UK equity mandates.
Previously, he worked on Commercial Union's UK equity team after graduating in 1989 with a degree in economics.
He now manages nine portfolios with a combined value of £1.3bn. These include both retail and pension funds.
He took over management of the Newton Higher Income fund in July 2001, after being the alternate manager for five years.
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