Q:  Why go global? A : We believe that investment opportunities need to be considered in a global context. As the world’s financial system becomes more interconnected, companies’ growth drivers become increasingly global, which means that assessing firms in isolation limits investors’ analysis and understanding. In 1994, we began managing active equity income portfolios. We believe that investing in companies with a sustainable business model to grow dividend payments is a sensible way to invest, in order to generate increasing total returns over the long term. We see income as a crucial component of total return, and we find that the stable nature of regular dividend payments should reduce volatility of the total return. Investing globally means that we look for our investment ideas in both emerging and developed markets. In 1995, three-quarters of all the companies in the world yielding more than 3% were in North America and Europe. Now, such companies are more evenly distributed across the globe: 50% of those stocks are now in Asia and emerging markets, and over 80% of those stocks are found outside the U.S. We invest in those companies around the world which we consider to be best aligned with our global investment themes and income requirements. Q:  What is the history of the company? A : BNY Mellon has owned the Newton group of companies since 2002. BNY Mellon operates a boutique manager model, under which those managers operate independently and also compete for business, and follow their own individual investment philosophies and strategies, keeping their distinctive specializations and processes. At Newton, we maintain our global thematic investment philosophy and process that have been in place since the inception of the firm in 1978. I have been at Newton since 2000 and I have been an investment manager for 22 years. The global equity income strategy was launched in November 2005 and has been managed through the global financial crisis. We manage about $9 billion in the global equity income strategy, and Newton as a whole manages $24 billion in global equities, with total assets under management of around $82 billion. Q:  What is your investment philosophy? A : We consider all investment risks and opportunities in a global context. We are active managers; we believe active management is the most efficient way of managing investment risks, and ensuring portfolios are designed appropriately in order to meet their objectives. We are active stock selectors, and construct portfolios from the bottom up, while maintaining a broad “top-down” perspective through our framework of long-term global investment themes. Amid the continuous news flow and market “noise” of the modern world, we think global perspective and focus on specific trends as highlighted by our investment themes helps to center our investment decisions and stick to our long-term objectives. Our whole investment team is located on a single floor in one location, London, which encourages active debate of opportunities, risks and trends, and swift implementation of investment ideas into portfolios. Continuous discussion between our “generalist” investment managers and “specialist” global analysts helps us to retain a broad, global perspective at all levels. Each portfolio is under the lead management of a single manager, which ensures full perspective over the positioning and risks across the whole portfolio. Q:  What is your investment strategy? A : As global investors, we think that deciding where to start looking for opportunities and which areas of risk to avoid is vital. In order to provide this perspective and focus we use global investment themes, of which we currently have 15. Our themes are not about predictions: they are based upon our observations and analysis of observable trends and changes which we think will influence global industries and investors. Analysis is a career at Newton, not a stepping stone; it is a distinct role and pathway from investment management. Our analysts are organized by global industry sector. They use our investment themes to focus on areas which should benefit from the long-term trends we have isolated, within which they seek to identify companies with strong fundamentals and attractive valuation. Companies which meet these strict criteria and rigorous analytical requirements then become recommendations, which form the basis of our stock selection. For our equity income portfolios, there are additional dividend yield criteria which must be met. The portfolio has two yield disciplines. First, it can invest only in stocks for the first time when their prospective yield is 125% of the world market. For example, if today the MSCI world market is yielding 2.5%, any new investment must yield greater than 3.125%. Secondly, if any holding within the portfolio sees its prospective yield fall below that of the market, it must be sold. These disciplines ensure two characteristics. First, that the portfolio yields more than the world market, and secondly that there is a further valuation discipline imposed upon the portfolio. The 25% premium discipline is set at a level whereby there is enough opportunity globally to be active investors. Currently there are over 800 companies around the world which yield more than 3.125%. Q:  How is your investment management team organized? A : The most important factor is that we are all located on a single floor in London. This ensures the ability to debate ideas is not stifled in any way by time zones, and that our global analysts can discuss recommendations and opinions with our investment managers in both formal and informal meetings. This, to us, is preferable to having analysts scattered across the globe, who may feel compelled to justify their placements. For example, if you had an analyst based in Japan for the last 20 years, they would have been under a lot of pressure to come up with Japanese ideas. The reality is that you did not really need to invest in Japan for the last 20 years. We would rather that our analysts find the best ideas from around the world, without imposing artificial geographical boundaries. Our analysts are career analysts; analysis is a distinct pathway from investment management at Newton. Our analysts cover all the major sectors in the MSCI or the FTSE World Index. Our global portfolio managers are split across teams focused on global equity, global multi-asset, global fixed income, and absolute return. In addition, we have regional desks for the U.K., Asia Pacific and emerging equities. Q:  How is income investing different at your fund? What kind of dividend paying companies are you looking to invest in? A : The key difference with our fund is the way we view income. Traditional income funds tend to focus purely on the dividend and on trying to generate a payout. We believe that that is too narrow a focus, and that looking at just yield and distribution ultimately leads to problems, particularly over-distribution. Our approach to income investing is more about the characteristics of the companies in which to invest. What we mean by “characteristics” is that when a company’s management pays a dividend back to its shareholders, it is a conscious decision to manage the business in a manner which should generate a sustainable cash flow, in order to maintain and grow that dividend into the future. Therefore, the discipline to which company management effectively sign up by paying a dividend is one of capital allocation. The company must allocate its capital across a business in a way that will protect its returns and cash flow generation, and thereby enable the firm to pay and grow its dividend. It is really important to understand this difference, because there are many high-yielding stocks in the market that do not have this discipline and fundamentals and that are simply generating a distribution payout, which is unsustainable. For example, this can be done simply by borrowing money and leveraging the businesses, which is unsustainable creates poor fundamentals. Such companies inevitably end up cutting their dividend payments, which renders them inappropriate for investors who aim to generate long-term, sustainable returns. For example, one could look at banks in North America and in Europe in 2007, all of which had high yields. None of these high dividend payments were, however, sustainable because of the high leverage in the businesses. By the end of 2008 and into 2009, none of these banks were paying dividends and the share prices were down by 80% or more. Q:  What kind of dividend yield you are looking to achieve? A : The yield disciplines on the fund ensure a yield that is at a premium to that of the world equity market. We do not target a specific yield, but instead invest in those companies where paying a dividend reflects the favorable characteristics which we seek. The fund pays out all the income it generates on a quarterly bias, and by actively selecting companies with the right characteristics, we aim to increase both the income and total return of the fund over the medium term. Q:  Why are companies paying dividends attractive compared to companies that buy back shares? A : The dividend discipline is vital to us because it imposes a capital allocation discipline upon company management. There are many examples of stocks which having generated plenty of cash flow, which want to continue to grow and therefore invest that cash flow in new areas. They end up destroying the returns of the business over the long term, which damages investors’ total returns. Our focus is upon companies whose management has proper capital allocation disciplines, and which continue to invest in order to protect grow the returns within the core business, while paying any surplus cash flow back to shareholders. We prefer such returns of cash to shareholder to be in the form of a dividend because we think this represents a firmer commitment and aligns the interest of investors and management more closely. Share buybacks are another way to return cash to shareholders, and as a method has become quite popular in America. We believe share buybacks do not represent or require the same discipline as a dividend payment. Historical evidence shows that companies in the U.S. buy back most of their shares when markets are at their peaks, and tend not to buy back any of their shares when markets are at their lowest. In the 2008-2009 bear market, companies hardly bought back any of their shares. As an investor, this was, however, exactly the sort of time when you would want companies to return cash to shareholders, in order to mitigate the effect of share price depreciation. By contrast, companies which were committed to paying dividends continued to do so, even when stocks plunged to lows in 2008. These dividends helped investors to recapture some of the losses in the market downturn. What we tend to find with companies that offer only share buybacks is that they are simply doing so to offset the dilution of option schemes which form part of their management team’s remuneration. This is not really what, as an investor, one would want the company to do, which would be to be buy back shares and cancel them, thereby reducing the number of shares in issue. Q:  Where are you finding your good ideas currently? A : In the current volatile investment environment, we focus upon stocks whose fundamentals and outlook are stable and durable, without undue reliance on economic cycles. We aim to invest in companies which offer good value, and which are able to withstand the challenges presented by a lower-return, more volatile investment world. We try to find businesses that demonstrate good durability to their business model, with strong capital allocation. These attributes support our confidence that the company’s returns are sustainable, that both cash flow and dividend payments have potential to grow. Finally the valuation needs to be attractive, and any undervaluation should not be a result of structural problems. For example, in the technology sector, the industry is moving away from PCs to tablets and phones, which is proving considerably challenging to the business models of certain companies that depend on the PC market and have not changed their businesses. Some firms in the technology industry, however, have developed their businesses to be able to serve PCs, mobiles, and other new devices, and are therefore in a much stronger position. That is the kind of fundamental of which we need to be aware. If there happens to be something that provides us with that valuation opportunity then, a firm in the latter bracket would become a good candidate for our portfolio. Further examples stem from our healthy demand and population dynamics investment themes, which highlight ageing populations and changes in global health care demand in different countries around the world. They also highlight changes in government and individual spending patterns on health care and key driving forces for the industry as a whole. Elsewhere, our smart investment theme focuses on innovation. Returning to health care, the pharmaceuticals industry is now developing drugs which are targeted at specific mutations of diseases. This development is improving the productivity of companies’ research and development, while improving efficiency, margins and sustainability of cash flows. On the other side, such developments will also make these treatments more effective, thereby reducing the health care costs, which would be beneficial for governments. Our population dynamics, healthy demand and smart investment themes direct us therefore towards the pharmaceuticals industry and those companies best able to participate in these trends. Q:  How do you deal with differing accounting standards around the world? A : Our global industry research analysts standardize company accounts so that we can compare them on a single basis. The analysts themselves devise the correct valuation measure and method for each a company. For example, valuing a mining company is very different to valuing a bank. Our analysts decide what is appropriate and how to gauge whether we are presented with an attractive valuation. Q:  How do you deal with different currency exposures? A : We consider currencies across the whole investment process. While currency forecasts and currency effects are included within the analysis process of a company, they are also important in overall construction of the portfolio. If a country is actively seeking to devalue its currency, for example Japan and the Japanese yen, then we need to be very careful regarding currency exposure effects if deciding to invest in a Japanese company. Part of the thought process in portfolio construction is, once you have found an attractive investment idea, is it in a country exposed to a currency with which we feel comfortable and are we willing to take on associated risks? Taking the pharmaceuticals industry as an example, we would feel quite comfortable investing in a Swiss pharmaceutical company because the currency is in a strong position, but maybe less comfortable investing in a French pharmaceuticals company on account of the euro. Q:  What is your portfolio construction? A : We are active investment managers and we believe in having conviction-led portfolios. We look to keep the number of holdings in the portfolio between 50 and 80 stocks. Since November 2005, we have had between 50 and 63 stocks. That means that when we consider introducing a new stock into the portfolio, we look to put it in at anywhere around 2% to 3% position of the portfolio. We would not purchase an individual stock above 5% of the portfolio, in order to ensure we maintain appropriate diversification. Our global investment themes provide our broad perspective on investment risks and opportunities. Against the persistent low-return and volatile investment backdrop, we maintain our focus upon structural growth companies, rather than those which fluctuate according to economic cycles. Our investment themes such as smart, healthy demand, havens and net effects lead the portfolio to be overweight the in the telecommunications, health care, consumer goods and utilities sectors. Equally, our themes centered on debt and related government interference lead us to be underweight in the economically sensitive sectors and those companies which are exposed to debt, such as financials and metal mining companies. Our investment themes also influence our geographical exposure. For example, in the European region, we do not have any investments in Spanish or Italian companies as we do not want exposure to the sovereign debt risks which still permeate these countries’ finances. We do, however, have meaningful exposure to Switzerland, the Netherlands and Norway, where the financial backdrop is more favorable. We do not aim to replicate either the performance or composition of any market index. We use market indices as benchmarks purely for comparison purposes. The ability to invest freely in companies outside the U.S. has meant that we have been able to control our portfolio exposure to the US dollar, which has been weak. It also means that we have been able to invest selectively in companies within the U.S. which have benefited from the weak U.S. dollar, such as manufacturing companies. Nevertheless, we see the U.S. dollar today as a “safe haven” currency, and therefore have hedged some of the portfolio’s euro and Brazilian real exposure back into U.S. dollar. Over the last 14 years, the U.S. dollar has been devalued deliberately to help rebalance the U.S. economy. Ultimately, we believe that the policies of the Federal Reserve will weaken the U.S. dollar. However, this is not happening in isolation. Many governments around the world are also taking steps to weaken their currencies; in relative terms, the U.S. dollar at the moment is the “least worst” option on a global scale, as there is still potential for macro-economic events to spark defensive moves back into the US dollar by global investors, on account of its “safe haven” status. Q:  How do you define and manage risk? A : We believe that investors’ attitudes towards risk should shift away from the “risk of losing out” which was born of the “Great Moderation” era from the 1980s to the early 2000s, and towards the risk of losing money in absolute terms. We believe the investment world has changed, and will continue to be characterized by lower and more volatile returns. We think there is real risk that investors could lose money, and lose it permanently. We have seen this transpire already with Spanish banks, Greek bonds and U.S. residential real estate. To manage risk, we consider our portfolios a more asymmetrical lens, with a view to protecting the downside just as much as participating in some of the upside. Therefore, risk is more fundamental and is no longer simply about relative positions. Aspects which we consider in particular are perceptible headwinds highlighted by our global investment themes, and the sustainability of a company’s business model/ We believe that the level of global debt accumulated at the sovereign and consumer level is a real risk that will continue to influence investment returns, government actions and economic growth around the world. These are fundamental considerations for investing in companies, bringing in questions regarding currencies and domestic financial stability. Desperate governments can do desperate things: these are the kind of risks we need to accommodate into our investment considerations. We include such considerations as part of our investment process; our global investment themes keep us aware of those risks, our analysts therefore focus upon avoiding companies exposed to such risks, and our investment managers are ware of these risks when constructing their portfolios. We also have an independent risk team within Newton which combs through every portfolio to ensure that they represent the views of Newton’s analysts, global investment themes, risk exposure and volatility levels. Risk management is therefore embedded within our investment process.