Mark Dampier: Go with Newton if you believe the economy can’t defy gravity

The Newton Global Income fund is 10 years old at the end of November. That kind of longevity might not seem remarkable when compared with the likes of the Foreign & Colonial Investment Trust, which was launched in 1868, but it is more impressive when viewed in the context of global income funds.

This sector is a relatively new one and Newton was one of the pioneers. Its track reord is strong and it is looking well placed to keep the returns coming in its second decade.

While UK equity income is likely to remain the bedrock for income-seeking investors, the main dividend-paying companies here are concentrated in a few sectors, where there is concern over whether yields will be maintained, let alone grow. This, combined with a growing focus on shareholder returns across the world, is a reason to consider diversifying overseas.

Newton's investment process involves looking at the globe through a thematic lens. This helps it to identify the opportunities and challenges facing the world andthe companies best placed to profit from them. Of course the fund's managers don't always get it right, but since its launch it has produced annualised returns of 8.3 per cent.

When buying any fund, an investor needs to look under the bonnet to understand the managers' views and what they're trying to achieve. For the past few years, the views of James Harries and his team have looked pessimistic.

For example, many individuals view the economy as a machine – quantitative easing (QE) is entered on one side, and economic recovery and inflation are produced on the other. Conversely, Mr Harries believes QE will have a deflationary effect, which may restrict the ability of companies to raise prices and grow profits. He therefore does not believe QE prompts a self-sustaining recovery.

Elsewhere, he feels a long period of low interest rates, combined with over-optimism, has led investors to "stretch for yield". This has resulted in money flowing to less creditworthy areas such as emerging markets.

Mr Harries likens the current economic environment to a circus act, with the entertainer (central banks) trying to keep a number of plates spinning on a pole. The widespread belief is that interest rate rises are on the horizon. However, Mr Harries expects rates in the US to increase by an insignificant amount in the short term, before falling again shortly after. In addition, his view – unpopular and unfashionable a couple of years ago, but now starting to be accepted by the mainstream – is that the US will launch a fourth round of QE.

In light of these views, Mr Harries has focused on high-quality businesses with predictable earnings. Although these companies are generally expensive, he expects further QE to underpin demand.

The US, which is where around 55 per cent of the fund is currently invested, is particularly highly valued. However, Mr Harries has uncovered a number of companies in this area that he feels have been undervalued by other investors. These include the household goods giant Procter & Gamble, a recent addition to the fund, which has suffered from a strong dollar.

He has generally focused on relatively defensive sectors such as healthcare and telecoms, while avoiding mining companies as he feels a high level of oversupply in means it will take a lot longer than people expect for the industry to fully recover. While he expects further weakness in emerging markets and Asia in the short term, he is positive on their long-term prospects and is waiting for a good opportunity to buy into the region.

Up until quite recently, the UK stock market was almost the sole hunting ground for income, but the Newton fund's historic yield of 3.9 per cent proves this is no longer the case. This is not a fund for the bullish investor who expects a significant rise in rates. The fund's defensive position means it could perform well if turbulent times are ahead.

Newton Global Income is therefore well suited to more cautious investors who feel, like me, that the fallout from the financial crisis could have further to go.

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 hl.co.uk