The Analyst: Newton's back? Yes, you do the maths

During the 1990s, Robert Shelton was one of the most highly regarded managers in the UK, and his Newton Income Fund was a top performer. The canny Yorkshireman's command of economic analysis and stock-picking earned him all the respect and plaudits now afforded to the current superstar manager, Invesco Perpetual's Neil Woodford.

However, Shelton's career was tragically cut short when he was seriously injured in a car accident in 2002. Thankfully he survived, but he spent months in hospital and had to give up managing the fund.

The Newton Income Fund soon started to struggle, and a succession of new managers were unable to turn things around. I was on the verge of recommending that investors sell their holdings when I heard that yet another new manager had been appointed – Chris Metcalfe. After meeting him, I felt confident that he had the potential to bring success back to the Newton Income Fund.

Mr Metcalfe explained that he would seek to reduce the number of holdings (which had grown to well over 80) to somewhere around 60. This would give greater focus to the portfolio and concentrate it into the ideas about which he had the greatest conviction. He also wanted to make greater use of the 20 per cent of the portfolio he is allowed to invest overseas.

He has been in the job for six months now, and I recently met him again for an update on progress. I am pleased to report that the changes he has made seem to be doing the trick. In fact, it has been one of the best performers in its sector.

So what has turned performance around? Mr Metcalfe has centred the current portfolio on defensive larger companies as well as energy and commodity stocks, while taking a negative view on banks and property.

What a fantastic mix this has been over the past six months! With house builders struggling, the banking system in turmoil and commodity prices booming, it is no wonder the Newton Income Fund has forced its way to the top of the tables.

The portfolio now consists of 60 stocks, 20 of which are listed overseas, including many of the main emerging markets. Note that the vast majority of UK stocks are exposed to overseas earnings rather than the domestic market. In my opinion, this is no bad thing given that sterling is likely to weaken over the next couple of years once this Government's much-vaunted economic stability is exposed as an illusion.

In terms of sectors, Mr Metcalfe currently favours mobile telecoms followed by aerospace, fixed-line telecoms, tobacco healthcare and food producers. The largest overweight position in the portfolio is Vodafone at 8 per cent. He believes that telecoms give him the best of both worlds – exposure to rapid emerging-market growth and, in the developed world, the expansion of data traffic.

He also has exposure to the potash producer K&S. This is an area Newton is very keen on, as this commodity is greatly in demand for agriculture but is a rare commodity and difficult to mine.

You may have noticed a familiar theme here. Even in a core UK fund such as this, we see the issues of commodities, energy, agriculture and emerging market growth rearing their heads. I have been mentioning it for many weeks now, but this really underlines how much these themes are driving global markets at the moment.

Chris Metcalfe is negative on banks, except for those – such as Standard Chartered and HSBC – that are exposed to Asian markets. Unlike other fund managers, he believes that the domestic banks are not nearly as good value as they appear, particularly Royal Bank of Scotland, which he believes overpaid for ABN Amro.

It is important to note that, despite its name, Newton Income has not been a real equity income fund for many years. It is basically a growth fund that pays a small yield, and Chris Metcalfe will continue to manage the fund along these lines. I do wonder whether persisting with the old name is the right thing to do – it is potentially misleading for investors. I have now met Chris Metcalfe twice and am impressed with his determination to get this fund back where it used to be. He has been putting much of his own money into the fund, which is a sign of confidence and commitment that I always like to see. In my opinion, the Newton Income Fund is much one to keep an eye on. If the improvement is sustained, you may once again see advisers recommending it at the core of a UK portfolio.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent