If recent market volatility has made you rethink your appetite for risk, IC top 100 fund Newton Real Return (GB00B8GG4B61) could be a good fund to take shelter in while retaining the chance for equity returns.
- Multi-asset approach mitigates risk
- Use of derivatives to boost returns
- Solid long-term performance
- Higher equity risk than other targeted-return funds
- Short-term underperformance
IC TIP RATING | |
Tip style | GROWTH |
Risk rating | MEDIUM |
Timescale | LONG TERM |
Newton Real Return aims is to hold on to capital and should be seen as a core defensive holding within your portfolio. Like other funds in the targeted-return sector, the fund's target is to minimise losses in falling markets; however, its higher than average exposure to equities means there is also scope for capital growth alongside its protective focus.
Following a month of bruising returns from the world's major stock markets, investors could be feeling the need to downgrade their risk or have realised that their portfolio is not balanced enough towards cautious investments.
Newton Real Return balances the upside rewards of the equity market with preserving capital through multi-asset positioning, using equities, alternative strategies and derivatives in order to manage returns. Manager Iain Stewart aims to return 4 per cent above cash a year and runs an unconstrained and flexible approach to investing using themes to identify opportunities. The fund also uses derivatives in order to protect capital and generate income, which gives it an added layer of protection against market falls.
Adrian Lowcock, head of investing at AXA Wealth, says the fund is a good choice for investors keen to "weather proof" their portfolios. Mr Stewart earned plaudits for managing to return 4 per cent during the financial meltdown in 2008. Since then his performance has been strong. In five years the fund has beaten the IA Targeted Absolute Return sector and over 10 years its performance against the sector average is strong, having returned 70.7 per cent compared with 36.46 per cent. Over the short term, the fund has underperformed its sector, but it has lost less than the sector in the year to date at a time of high market turbulence, falling by 0.42 per cent compared with a drop of 1.1 per cent for the sector.
The fund has been derisking its strategy over the past year in the belief that downside volatility is likely to rear its head in 2016. It is currently not fully invested and the equity focus remains on non-cyclical business models. Mr Stewart looks for companies with strong balance sheets and the ability to compound cash flows throughout market cycles, and returns are typically generated through large blue-chip stocks.
The portfolio is split between 51.02 per cent return-seeking assets and 48.98 per cent stabilising assets and hedging positions. The return-seeking section of the fund is mainly focused on equities and weighted towards healthcare and consumer goods. But it includes positions of under 3 per cent in corporate and convertible bonds and infrastructure funds as well as renewable energy. The hedging portfolio section is weighted towards government bonds. Mr Stewart has been decreasing his cash position and increasing his exposure to government bonds.
The fund invests selectively in equities, corporate and government bonds, cash, derivatives, real estate, commodities, currencies, infrastructure and renewable energy, which tend to be less correlated to equities and bonds. According to Mr Stewart, the percentage return generated by infrastructure and renewable energy holdings was equal to or greater than that generated by equities in 2015.
However, the manager has downsized the cash chunk of the fund and increased his exposure to government bonds in recent months and Mr Stewart claims to be taking more interest rate risk than the consensus in US bonds.
Compared with other total return funds this does come with a higher risk due to its low cash levels and comparatively high equity exposure - the fund's maximum losses are higher than the sector average for each of the past four years. But returns have also been higher than the average and the diversified natures of the portfolio should protect it in the case of dramatic market falls.
According to Hargreaves Lansdown, which lists the fund among its top-rated Wealth 150 list: "This is the type of fund we believe comes into its own when markets hit a rough patch, but which also has the ability to deliver good long-term returns thanks to its core of solid companies that are generally well-placed to withstand a variety of economic conditions. Over the long term, its balanced and defensive approach could provide useful diversification from more adventurous holdings."
NEWTON REAL RETURN W ACC (GB00B8GG4B61) | |||
PRICE: | £1.09 | 3-yr MEAN RETURN (%): | 3.47 |
IA SECTOR: | Targeted Absolute Return | 3-yr SHARPE RATIO (%): | 0.57% |
FUND TYPE: | OEIC | 3-yr STANDARD DEVIATION (%): | 5.16 |
FUND SIZE: | £9.110bn | ONGOING CHARGE (%): | 0.79 |
No OF HOLDINGS*: | 111 | MINIMUM INVESTMENT: | £20 |
SET-UP DATE: | 31-Mar-04 | MORE DETAILS: | newton.co.uk/uk-institutional/solutions/strategy/real-return-strategy/ |
MANAGER START: DATE | 31-Mar-04 |
Source: Morningstar, as at 25/01/16 *Data from fund factsheet, as at 31/12/15
Top 10 holdings
Holding | Percentage |
USA (Gov) 1.0% 31/10/16 | 15.40% |
USA (Gov) 3.0% 15/05/2045 | 5.40% |
USA Treasury Notes 1.5% 31/08/2018 | 4.07% |
ETFS Physical Gold 0% Secured Note | 2.72% |
Microsoft Corp | 2.39% |
Australia (Gov) 4.5% 21/04/2033 | 2.29% |
Wolters Kluwer NV | 2.07% |
Australia (Gov) 3.75% 21/04/2027 | 2.05% |
Roche AG | 1.95% |
Japan Tobacco Inc | 1.89% |
Source: Fund fact sheet, as at 31/12/15
Asset breakdown
Asset | Percentage |
Equities | 42.63% |
Corporate bonds | 2.92% |
Convertible bonds | 2.05% |
Infastructure funds | 2.10% |
Source: Fund fact sheet, as at 31/12/15
Fund performance (cumulative total returns %)
1m | 3m | 6m | 1yr | 3yr | 5yr | 10yr | |
Newton Real Return | 0.0 | -0.6 | -0.7 | -1.8 | 7.4 | 16.2 | 78.6 |
IA Targeted Absolute Return sector | -0.8 | -0.4 | -0.9 | 0.6 | 9.0 | 13.0 | 36.5 |
Source: FE Analytics, as at 2/01/16