Newton Income
We think Newton has this fund on the right track.
Metcalfe has navigated the fund remarkably well through the choppy markets of 2007 and 2008. Since he took the helm towards the end of April 2007, the fund has clocked in with a second percentile performance to the end of July 2008 within its Morningstar UK Large Cap Blend peer group. That level of outperformance is not solely down to Metcalfe’s stock picking ability, but it does show he is able to use Newton’s resources to good effect. Newton’s thematic research led all their managers to underweight financial stocks, particularly UK banks, across all their portfolios in 2007 and that strategic move contributed to this fund’s strong showing over the past year.
We believe Newton’s career analyst bench is important to this fund, and we regard their research capabilities highly. Newton’s analysts have often worked in their respective industries before analysing stocks, and we think their industry experience can add value to their research. The analyst team combines macro themes with bottom up analysis, and their research leads to a recommended list of global stocks which reflects their level of conviction. That said, Metcalfe has the final call on stocks and his strategy has also contributed to the fund’s success.
Metcalfe cherry picks from the recommended list using a mix of valuation and growth metrics. On the valuation side, , he uses a variety of yardsticks including enterprise value to sales and cash flow and sum of the parts. However, this fund is by no means a value play. Metcalfe also looks for stocks with strong earnings and cash flow growth potential, but he avoids companies that are too dependent on acquisitions for growth and those with high levels of debt on the balance sheet. We think Metcalfe’s strategy is a sound one and Newton’s thematic research, which Metcalfe has used effectively, adds another layer of support.
We like what we have seen of Metcalfe’s tenure so far, but he has heightened the concentration risk here. He has gradually pared back the number of holdings from around 75 stocks when he took over the fund to about 45 holdings as of March 2008. Now, the fund’s top 10 holdings consume more than half of the fund’s assets. His decision to reduce the number of holdings puts the onus on his portfolio management skills and his stock-picking ability. This early in his tenure, the extent to which Metcalfe is adding value above Newton’s research is still unclear. However, the promising early results suggest that he has effectively leveraged the firm’s resources. We'd like to see more of what he can do, but the fund has shown much improvement.
