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A top performer that's low risk

This fund's delivering consistently good returns
March 27, 2012

If you are risk averse, finding investments for your individual savings account (Isa) in current market conditions is trying, not least because of increased volatility. In this respect, funds are a better option than a single security because these spread risk across a portfolio of investments and can be managed to reduce volatility.

IC TIP: Buy at 115.36p
Tip style
Income
Risk rating
Low
Timescale
Long Term
Bull points
  • Consistent positive returns
  • Low volatility
  • Attractive yield
  • Reasonable costs
Bear points
  • Can fall behind in rally
  • Slight negative return in 2011

A fund singled out by a number of advisers for its lower degree of risk achieved by its management style is Newton Real Return, an IC Top 100 Fund. This fund sits in the Investment Management Association's (IMA) absolute return fund sector, but unlike many of its peers it has largely done what these funds are supposed to: deliver consistent positive returns. When markets plummeted more than 30 per cent in 2008, for example, Newton Real Return made a positive return of nearly 4 per cent, and it has made positive returns in four out of the last five years, an exception being a slight negative return last year.

The fund also makes good cumulative returns putting it among the top 10 funds in its sector over three and five years, while maintaining lower volatility than equities. It offers an inflation-beating yield of more than 3.5 per cent.

"This fund will appeal to a broad range of investors seeking a return over inflation with low volatility and it is well positioned to perform in the current economic climate," says Andy Parsons, head of investment research at The Share Centre. "The fund uses a three-pronged approach to maximise opportunity and minimise risk. These are: unconstrained stock picking, diversification through global investment across several asset classes and strong defensive qualities with a bias towards capital preservation."

Newton Real Return's objective is significant real rates of return with a return of cash (Libor) + 4 per cent a year over three to five years, before fees are deducted.

The fund mainly invests in UK and international securities, with equities currently accounting for nearly half the portfolio. It can also hold deposits, money market instruments, derivative instruments, forward transactions and collective investment schemes. These are chosen according to both top-down considerations and the specific attributes of each investment, using Newton's thematic process for portfolio construction.

The fund cannot borrow stocks to go short but uses derivatives such as index puts and collars to protect against market risk. Although at present cash-related investments only account for about a quarter of assets, in times of difficulty this can rise to 50 per cent.

The fund's manager, Iain Stewart, is one of the longest serving at Newton, having joined in 1985 since when he has run multi-asset mandates, and he is also a member of the global strategy group. The fund is run by a team led by Mr Stewart who is well supported by analysts and strategists, and alternate manager James Harries.

It has a reasonable total expense ratio of 1.61 per cent and no performance fee, in contrast to a number of absolute return funds that charge more and add a levy when the fund meets its targets.

The drawback with funds such as Newton Real Return, which mitigate downside and aim to achieve regular steady returns, is that they can get left behind in rising markets. But for investors seeking to preserve wealth and achieve some growth and income, this is one of the best options available. Buy.

Read more on safe haven funds

NEWTON REAL RETURN A INC (GB0001642635)

PRICE:115.36pMEAN RETURN:8.59%
IMA SECTOR:Absolute returnSHARPE RATIO:1.24
FUND TYPE :Open-ended investment company 1-YEAR PERFORMANCE:2.13%
FUND SIZE:£5.4bn3-YEAR ANNUALISED PERFORMANCE:7.21%
No OF HOLDINGS:1105-YEAR ANNUALISED PERFORMANCE:7.05%
SET-UP DATE:30 October 2000TOTAL EXPENSE RATIO:1.61%
MANAGER START DATE:1 October 2004YIELD:3.55%
TURNOVER:56%*MINIMUM INVESTMENT:£1,000
STANDARD DEVIATION:6.42%MORE DETAILS:bnymellonam.co.uk

Source: Morningstar & *Newton

Performance data as at 20 March 2012

Top 10 holdings as at 29 February 2012

Australia (Commonwealth) 5.5% Bonds 21/04/20233.0
Newcrest Mining2.9
GlaxoSmithKline2.9
Bayer2.8
Total SA Eur 2.52.5
ETFS Physical Gold 0% Secured Note (USD)2.5
Norway (Kingdom of) 4.5% Bonds 22/05/20192.4
USA Treasury Bonds 2.5% Tii 15/01/20292.3
Reynolds American Inc Common Stock2.1
Yamana Gold Inc Common Stock2.1

Asset allocation

Equities49.44
Cash & cash equivalents24.76
Bonds20.68
Risk offsetting positions18.80
Convertibles1.61
Others3.51