Newton manager defends using derivatives to boost income

Tineke Frikkee, manager of the Newton Higher Income fund, has rejected concerns about the use of income-generating derivatives in her £2.7 billion fund after Hargreaves Lansdown cut the fund from its Wealth 150.

Hargreaves axed the fund due to concerns over the excessive use of covered-call options and special cum dividends. It claims that the decision by BP to suspend its dividend had affected the fund, which has an 8% weighting in the oil giant.

Meera Patel, senior analyst at Hargreaves Lansdown, says the firm has some short-term concerns despite BP being set to resume dividend payments in the first six months of next year.

She says: “The increased use has driven up the yield and we feel this could potentially affect the fund’s capital growth.” (article continues below)

However, Frikkee says the special cum dividend is only slightly up on its average in the past four years while the use of covered call options was down when the BP dividend was cut.

She says: “Special cum dividends have been 3-4% of income on average in the last four years. Since BP, it has risen to a 5.7% contribution of income. We have had the third-quarter dividend and it is gradually moving back to its average level which it could reach by December.”

Frikkee says the group had seven days’ trading—between the BP announcement of cutting its yield and the fund’s quarterly trading statement—to address the cut and that the only way was to introduce a special dividend cum yield.

She says: “Luckily, the cut saw yields fall and we had three stocks recommended and they replaced BP. This saw the cum dividend yield rise above its traditional level but it was a one-off that is already being addressed.”