Mark Dampier: Growth is an illusion, so Newton sticks to stocks with substance

Managers believe that the policy intervention we have seen from governments and central banks across the globe is not enough to rid the world of low growth

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The Independent Online

With numerous stock markets reaching new highs, many financial commentators share a common belief: global economies are on the road to recovery. Against this backdrop they expect that interest rates will soon begin to normalise.

Newton's view of the world, however, is very different to that of most other commentators. The fund manager believes that the upturn has been driven by government and central bank policy across the globe, rather than any real economic recovery. It argues that an unprecedented amount of quantitative easing has inflated asset prices.

In this environment, risk has been back on the table for many savers. A lot of investors have been moving away from their comfort zones in search of ever-increasing returns –rotating from bonds to equities, for example. Yet the managers at Newton believe that the policy intervention we have seen from governments and central banks across the globe is not enough to rid the world of low growth.

To put it bluntly, risk is very much prevalent.

I recently caught up with James Harries, manager of the Newton Global Income fund, who subscribes to the view that economies are not recovering. In a lower-growth world, in which he anticipates greater stock market volatility, he believes investors will ultimately prize companies offering the potential for growth and stability.

He continues to favour diversified larger firms with defensive characteristics. He currently has a bias towards the healthcare and telecoms sectors, as well as selected technology and consumer goods businesses. The number of stocks in his portfolio has been reduced in recent months from 60 to around 55 names – reflecting the manager's view that stock markets are generally more fully valued.

That said, the fund's exposure to the US has grown considerably in recent years. Mr Harries accepts that America is not the most attractively valued market, yet he believes there are still a number of stocks that, despite being good businesses, are undervalued by other investors. New holdings include McDonalds, which currently yields 3.6 per cent, and the payment service provider Western Union, with a yield of 3 per cent.

The fund itself currently yields a healthy 3.5 per cent, although, historically, its dividend growth has not always been smooth. Indeed, it has been affected by its ever-increasing exposure to the US; payout ratios tend to be lower here than in many other regions given a general preference for share buybacks over paying dividends. The prospects for a bigger payout from the fund this year are fairly flat, given the impact of a 30 per cent dividend cut by the energy giant Centrica.

One region in which Mr Harries expects to find more opportunities is the emerging markets. He will, however, continue to avoid investing in China for the foreseeable future based on his negative outlook. Growth is slowing and he is concerned about the unsustainably high levels of debt of Chinese businesses. Mr Harries believes that the country may also look to devalue its currency in future; if this occurs, it could mark an inflection point for the global economy, while it would also prove a negative for sterling-based investors.

In my view, this fund should come into its own and offer some shelter in challenging market environments. If the team at Newton are proved right, the fund should ultimately prosper against many of its peers. However, the team also need to be careful not to back themselves into a corner in the event they prove to be wrong. Over the past five years, we have seen a number of other fund managers whose strong views have turned out to be mistaken, affecting their performance. That said, these have tended to be the managers who anticipated a much quicker return to a normalised economic cycle.

I have much greater sympathy with the Newton view. Financial crises, such as the one witnessed in 2008, take a very long time to resolve. Furthermore, I believe that any kind of normalisation of interest rates remains a long way off. While the fund's avoidance of more cyclical and lower-quality areas of the market has led to a shorter-term spell of more subdued performance, its global thematic approach has proved a success over the long term.

I continue to view the fund as a sensible core holding in a diversified portfolio.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.uk

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