Investment yields become vital amid changing market dynamics

London: Defensive assets paying high yields like drug stocks are good value, while bargain hunting for cheap growth companies is dangerous in a market set to languish near recent lows until late next year, the manager of Newton's Higher Income fund said.

A fundamental change in the dynamic of the investment cycle driven by the seizing up of the credit markets is highlighting the importance of yield, said Tineke Frikkee, manager of the £2.1 billion (Dh11.44 billion) fund.

Newton Investment Management Limited is a London-based global asset management subsidiary of The Bank of New York Mellon Corporation and part of BNY Mellon Asset Management.

Newton has assets under management of more than £34 billion.

"It [the market] was in the leverage model and now we are being shocked into more of a thrift model where credit is much more expensive," Frikkee said.

"The thrift model is going to last for a while, once we get through the crisis we will be in a world where UK equity returns are lower because there's going to be less gearing around."

The fund has fallen 24.5 per cent in the 12 months to end-November, but outperformed its peers in the Lipper Global UK equity Income benchmark to rank ninth out of 90 funds.

In a world of lower returns, yield becomes all the more important, and until the storm clouds have passed, it will pay to stick to companies with rock-solid balance sheets, she said.

"Investors should hide in companies with strong balance sheets, with relatively low gearing and very little need of refinancing for the next 18 months."

She said companies that have relied on cheap credit being around, such as banks and property stocks, will struggle for the next 12 to 18 months.

"The combination of a weak balance sheet and earnings that are sensitive to consumer spending are way too risky, this is a period where you back the winners. It doesn't pay to be brave and go into risky stocks," the fund manager said.

Frikkee said the fund yields 6.8 per cent, while the yield on the FTSE 100 is 4.8 per cent. The fund only buys stocks that have an above-average yield.

"The fund is overweight in GlaxoSmithKline, which is on a yield of about 6 per cent and has a commitment to grow this by about 8 per cent a year," Frikkee said, adding falling interest rates make this yield all the more attractive.