OUR GUIDE TO EQUITY INCOME INVESTING INCOME GENERATION COVERED FROM EVERY ANGLE

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1 OUR GUIDE TO EQUITY INVESTING GENERATION COVERED FROM EVERY ANGLE

2 FIRST THINGS FIRST: DECIDING WHAT YOU WANT FROM YOUR INVESTMENTS Put simply, people usually invest their money in funds in order to help meet one of several primary objectives. One of the most common objectives is to grow the value of an investment, often over a particular timeframe and accepting a certain level of risk that its value and any income from it may go up and down over time and you may get back less than what you originally invested. For example, parents may invest, either on a one-off or regular basis in order to build up a lump sum to help pay for a child s education. Another common reason to invest in funds is to generate an income from the investments in order to meet expenditure needs, for example to supplement a pension. Again, investors seeking to generate an income from their investments will need to accept the risk that the value of their investment (and any income from it) is likely to go up and down over time. Finally, some people invest in funds with the aim of generating a combination of growth and income. For example, someone reducing their working hours a couple of years before they intend to retire might want to supplement their salary with some income from their investments, while maintaining the potential for their investments to grow in value over the longer term. Identifying your primary objective as an investor is often the best starting point, as this should help you to identify a fund (or funds) designed to meet your objective. Whatever your objective, there will often be a number of different ways of trying to achieve it. This is where BNY Mellon may be able to help. If you have any questions about investments, or you are unsure whether a fund might be suitable for you, we recommend that you contact your financial adviser. Identifying your primary objective as an investor is often the best starting point, as this should help you to identify a fund (or funds) designed to meet your objective. 2

3 WHAT IS EQUITY INVESTING? An equity is another name for a company share, so equity income funds are investment funds that focus on buying the shares of companies that pay attractive dividends a share of the profits made by the company and paid out to shareholders, usually at regular intervals. Dividends are often considered by investors to play an important role. First and foremost, over longer time periods, they have the potential to make a positive contribution to investment returns; although a single dividend payment may seem small relative to the value of an investment, they may add up to a significant amount over time. More generally, the ability of a company to pay a dividend to its shareholders, and particularly to maintain or even increase the size of the dividend, is widely considered to be an important indicator of a company s likely strength, profitability and financial health. Since the onset of the global financial crisis, such indicators of resilience have often been greeted warmly by professional investors. It is important to remember however that dividends are not guaranteed, and can decrease, increase or stop in the future. 3

4 HOW DO EQUITY S WORK? What happens in practice in an equity income fund is that the manager of the fund will search for the companies sometimes in specific countries or regions, depending on the fund s objective that he or she believes will be able to pay the highest dividends and also maintain or even raise them over time. When the fund receives any dividends (bearing in mind that companies do not all pay their dividends on the same date) the manager combines them together before distributing the proceeds to investors. As an investor, you usually have the choice either to receive your entitlement of the dividends the fund has received as income, or to re-invest the dividends in the fund and so increase your shareholding. You may also have the option of purchasing accumulation shares. With accumulation holdings the income is added to the capital value of the fund and this increases the value of the shares you hold. As with any stock market investment, it is important to remember that the value of an investment in an equity income fund will typically go up and down over time, and any income from your investment is not guaranteed and you may get back less than what you originally invested. For more information on how equity income investments can help you meet various investment needs, please turn to the page entitled How can equity income funds help?. As an investor, you usually have the choice either to receive your entitlement of the dividends the fund has received as income, or to re-invest the dividends in the fund and so increase your shareholding. 4

5 WHY DO COMPANIES PAY DIVIDENDS? When new companies start up, they will usually need money in order to get their business going. For example, they may need to buy equipment, or supplies in order to make the products or deliver the services that, ultimately, their customers will buy from them. Companies can look to several different sources to raise money to finance their activities. They may go to a bank, or other lender, but many companies issue company shares as a way to meet their long-term financial needs. So, when you invest in a company by buying shares (otherwise known as equities ), you are actually buying a part of the company. When a company sells its goods or services, any of the money that is left over after it has met its costs such as wages for employees, taxes, and materials is the company s profit. Investors will often have a choice of many companies in which they could buy shares. Naturally however, they will usually be drawn to the most profitable companies, or to those companies which they believe to have the best prospects. Either way, their aim will ordinarily be to generate the best returns, either through the growth in the value of the shares they own, and/or through the distributions of profits they may receive while they are shareholders in the form of dividends. WHAT IF THEY DON T? A company can keep hold of its profits by reinvesting them in the business with a view to growing its activities or profitability without needing to sell more shares or borrow money from a bank or other lender. For example, it may develop a new service, or hire more staff to try to sell more of its products. This approach may be desirable for some companies, because it may be cheaper or more efficient for them to use their own profits to pay for future business activities than to borrow money from other sources. For shareholders, this may be an attractive approach because, in the long term, reinvesting profits into the business may help the company to grow and to become more profitable. It is a company s profitability and prospects for growth that, to a large extent, dictate how much the company will be valued by investors. In other words, how much investors shares will be worth. Given the competition between companies for investors money, companies will often start paying dividends as a way of making themselves more attractive than other businesses also competing for investors attention. Once they have started paying a regular dividend, companies will often go to considerable lengths to maintain its size, even if they suffer a setback to their profitability, as the cancellation of a regular dividend is usually viewed somewhat negatively by investors. 5

6 HOW CAN EQUITY INVESTMENTS HELP? Equity income investments are widely considered to have the potential to play a useful role both for investors seeking an income from their investments, as well as for those for whom growing the value of their investments is the main objective. 1FOR INVESTORS SEEKING TO GENERATE AN In recent years, income from savings and investments has become scarce, with many people finding that the income generated by money held in bank accounts is insufficient to meet their needs, or to keep up with the longterm effects of inflation. Indeed, although inflation has gone up and down sharply, interest rates have remained very low. The combination of occasional periods of high inflation, combined with very low interest rates can significantly reduce the purchasing power of savers money. In other words, the same amount of money will only pay for a smaller quantity of goods or services than it would have previously as the cost of goods and services rises with inflation by more than the value of money held in a bank account. Holders of certain traditional income-generating investments, such as government bonds have faced similar difficulties. In this environment, if you need your investments to generate an income for you (perhaps for example to supplement your pension), equity income funds may be an attractive way of helping to meet this objective. You can usually choose to have your entitlement to any dividends received by the fund paid out to you as a regular distribution of income. It is important to remember that the value of an investment in an equity income fund will typically go down and up over time, and any income from your investment is not guaranteed. You may also get back less than you originally invested. 6

7 2FOR INVESTORS SEEKING TO GROW THE VALUE OF THEIR INVESTMENT Although the name equity income funds may suggest otherwise, these funds are in fact very popular among investors seeking to grow the value of their investments over the long term. Rather than choosing to have any income to which you are entitled paid out from the fund in the form of regular cash payments, if you have the objective of growing the value of your investments, you can usually choose to have your income re-invested in the fund and sometimes the option to purchase accumulation shares or units. By reinvesting income into the fund in essence automatically buying more of the shares the fund holds you are effectively increasing the proportion of the companies you indirectly own. This, in turn, means that you will be entitled to a greater proportion of any dividends the company pays out to shareholders in the future. Over the long term, the effect of this so-called compounding of re-invested dividends can be very significant. Furthermore, by reinvesting any income at regular intervals, you benefit from the long-term effect of pound-cost averaging, whereby a specific amount of money will buy more shares when their price is low (and therefore more likely to rise), and fewer shares when their price is high (and therefore more likely to fall). 3FOR INVESTORS SEEKING BOTH GROWTH AND Amid persistent economic uncertainty, it remains impossible to predict accurately what the future holds for investors. Given this backdrop, there is a strong case to be made for an approach to stock market investing that seeks to focus on the strongest and most profitable companies with the greatest ability to maintain the size of the dividends they pay to their investors. By their very nature, these are the kinds of companies equity income funds will typically focus on. If you wish to receive the income your investments generate for you, while also benefiting from the potential long-term growth in the value of the shares held in the fund, the broad characteristics of the shares typically targeted by equity income funds may make a compelling investment case. If you are seeking a balance between income and growth, and you do not require the income generated, it can be re-invested in the fund or you can sometimes choose to buy accumulation shares or units instead. 7

8 GENERATION COVERED FROM EVERY ANGLE Our range of equity income investment funds covers numerous geographical regions, and offers a broad range of risk characteristics. The following chart gives a snapshot of the funds in the range: UK SHARES MAIN MARKET FOCUS GLOBAL SHARES ASIA SHARES EMERGING MARKET SHARES DOES THE ALSO INVEST IN BONDS? ISA ELIGIBLE? NEWTON MANAGED NEWTON GLOBAL HIGHER NEWTON ASIAN NEWTON EMERGING NEWTON HIGHER INSIGHT EQUITY The chart is for illustrative purposes only. The markets in which a fund invests may be subject to change. Some of these funds invest in international markets which means they are exposed to changes in currency rates which could affect the value of the funds. Some of these funds also invest in emerging markets. These markets have additional risks due to less developed market practices. You should read the key investor information document (KIID) for any fund in which you wish to invest. A complete description of risk factors is set out in the prospectus in the section entitled Risk Factors. The prospectus and KIIDs can be found by visiting The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested. 8

9 A HISTORY OF INNOVATION IN EQUITY Newton, a BNY Mellon company, is a widely recognised pioneer in the field of income-focused equity investment. Over many years, Newton has developed a reputation for its distinctive global thematic approach to investing, which it has applied to a wide range of equity income funds through a simple but disciplined methodology. Insight Investment, based in London was founded in 2002, and became part of BNY Mellon in The firm s range of funds covers fixed income (effectively loans to companies or governments), multi-asset funds (which invest in different types of financial assets), specialist equities (company shares) and absolute return-style funds (which typically seek to make a return in all market conditions, although this is never guaranteed). 9

10 ARE YOU USING YOUR ISA ALLOWANCE? Whatever your investment needs, are you making the best use of your ISA allowance? By investing in a stocks and shares ISA (individual savings account), you will be able to benefit from any growth in the value of your investment, without having to share it with the taxman. For more information, please see our ISA fact file. If you have any questions about the tax treatment of investments held in an ISA, please contact your financial adviser. ISA FACT FILE An Individual Savings Account (ISA) is an account that protects your investment returns from tax (it is not an investment in its own right, but the account is able to hold funds). You can choose an ISA for cash savings and investments in stocks and shares. Any eligible UK resident aged 18 or over can invest. BNY Mellon does not offer cash or junior ISAs. An individual can invest up to a specific limit set each tax year by HM Revenue & Customs. For the 2013/14 tax year the limit is 15,000. Any allowance that you do not use in one tax year cannot be carried over to the next. The risks: investments held in stocks and shares ISAs can grow in value but they can also fall and you may get back less than you originally invested. ISA investments are liable to inheritance tax on death. Income tax deducted at source on foreign dividends may be recoverable, but the tax credits attached to UK dividends are not. Tax treatment depends on the individual circumstances of clients and may be subject to change. 10

11 ABOUT BNY MELLON BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 35 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has US$1.6 trillion* in assets under management. Additional information is available at *Source: BNY Mellon as at 31 March

12 A complete description of risk factors is set out in the prospectus in the section entitled Risk Factors. You should read the prospectus and key investor information document (KIID) for each fund in which you want to invest. The prospectus and KIIDs can be obtained by calling us on the freephone number outlined below or visiting our website (FREEPHONE) BNY MELLON MANAGERS LIMITED CLIENT SERVICE CENTRE PO BOX BRENTWOOD CM14 9LS This is a financial promotion for Retail Clients and should not be taken as investment advice. This document should not be published or distributed without authorisation from BNY Mellon Investment Managers EMEA Limited (BNYMIM EMEA). To help continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us. Tax treatment will depend on the individual circumstances of clients and may be subject to change in the future. The Funds mentioned in this document are sub-fund(s) of BNY Mellon Investment Funds, an openended investment company with variable capital (ICVC) with limited liability between sub-funds. Incorporated in England and Wales: registered number IC27. The Authorised Corporate Director (ACD) is BNY Mellon Fund Managers Limited, incorporated in England and Wales: No Registered address: BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Authorised and regulated by the Financial Conduct Authority. Newton Managed Income Fund is a sub-fund of the BNY Mellon Managed Funds 1, an investment company with variable capital (ICVC) incorporated in England and Wales under registered number IC and authorised by the Financial Conduct Authority. BNY Mellon Fund Managers Limited (BNY MFM) is the Authorised Corporate Director. BNY MFM, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No Authorised and regulated by the Financial Conduct Authority. ICVC investments should not be regarded as short-term and should normally be held for at least five years. This document is issued in the UK by BNYMIM EMEA, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No Authorised and regulated by the Financial Conduct Authority. BNYMIM EMEA, BNY MFM, Newton and any other BNY Mellon entity mentioned are all ultimately owned by The Bank of New York Mellon Corporation. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries. Issued as at 9/7/2014 CP (12M) T /14.