Get an attractive Isa income with Newton Global Higher Income

Newton Global Higher Income offers an attractive yield of 4.74 per cent and aims to generate an increasing income, providing growth in income and capital over time. It has not made the top total returns in the Investment Management Association (IMA) Global Equity Income sector, but given its defensive positioning should be better at protecting investors in a falling market. The fund also pays dividends quarterly.

"This fund provides a way for income seekers to diversify away from the UK and access countries such as Australia, Canada and the US where the dividend culture is well established," says Adrian Lowcock, senior investment manager at Hargreaves Lansdown.

We include it in our IC Top 100 Funds for reasons including its focus on sustainable dividends reinforced by its strict yield discipline, which has given it notable resilience in difficult market conditions.

The managers have recently changed the fund's weighting to technology shares because some of these have become appealing due to their changing dividend policies.

"Traditionally, technology companies never really paid dividends, so we were unable to make investments, resulting in us being structurally underweight technology for a long time," says Nick Clay, alternate manager of Newton Global Higher Income Fund. "However, of late some of the more mature technology companies have started paying dividends and are increasingly doing so. You have the likes of Apple, Cisco, and Microsoft, which are all paying cash back to investors."

Every holding in Newton Global Higher Income's portfolio has to yield at least 25 per cent more than the FTSE World Index at point of purchase. Any holding whose prospective yield falls below the comparative index yield is sold.

The funds' managers have also done a thorough analysis of valuation and growth prospects for individual holdings. Key areas of investigation include whether firms are well run, if valuations are attractive and if they are likely to produce sustainable growth.

"These factors combined to make Microsoft (the fund's top holding) an attractive proposition," says Mr Clay. "We started buying Microsoft over a year ago. It was priced as if it would never make money again – but just on its cash flow alone we thought it was an attractive investment.

Microsoft is a well run, established business. While perhaps not in fashion, it supplies its products to corporations. This kind of business is sticky and does not churn. Now with its new management in place, they want to keep its core business going while returning cash to shareholders, so we have been able to buy."

However, Newton Global Higher Income remains underweight technology relative to the FTSE World Index because many of the companies in the sector still do not pay dividends. However, Mr Clay says there is scope to add if and when more companies start to reward shareholders.

A global equity income focus introduces exposure to overseas currencies and while any weakness in sterling would make dividends from foreign companies more valuable to UK based investors, if sterling strengthens the value of the dividends will fall.

But with an attractive yield, good downside protection and global diversification, this fund is still a worthy income addition. Buy.

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Source: Morningstar as at 31 March 2014

Source: Morningstar as at 28 March 2014

Top 10 holdings as at 28 February 2014

Sector breakdown as at 28 February 2014