BULL POINTS
■ Real return target
■ Strong track record
■ Flexible asset allocation
■ Transparent portfolio
BEAR POINTS
■ Likely to underperform in strong markets
■ Significant manager risk
The best way to make money is not to lose it. That may sound like common sense, but actually most investors are obsessed with upside opportunity rather than downside risk - to their detriment over the past decade. Iain Stewart is an exception, which makes his Newton Real Return fund a shrewd choice in this bipolar economic climate.
Mr Stewart’s focus on capital protection is evident from the track record of Real Return, which was relaunched in the wake of the 2000-2002 bear market with the then-novel objective of outperforming cash rather than an equity index. It has beaten its target of Libor plus 4 per cent since Mr Stewart took over in March 2004, with a cumulative net return of 103 per cent compared with the benchmark's 65 per cent. More strikingly, it has also easily beaten global equity markets and produced a positive return in each year since launch - even 2008. That’s something few funds can claim.
IC TIP RATING | |
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Tip style | Value |
Risk rating | Low |
Timescale | Long term |
What do these mean? Find out in our |
The complaint about most products of this ilk is their complexity. Critics say that to magic inflation-proof returns out of markets requires devious strategies that may have unintended consequences. Yet Newton Real Return has a straight-forward portfolio, quite like a balanced pension fund's. Mr Stewart has a core position in equities - currently 58 per cent of the fund - around which he holds more stable assets, above all bonds, to mitigate the downside risk. He loosely targets annual volatility half way between bonds and equities.
NEWTON REAL RETURN | |||
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PRICE | 113p | NET ASSETS | £2.0bn |
No OF HOLDINGS: | 85 | 1-YEAR PERFORMANCE | 14% |
SET UP DATE | August 1993 | 3-YEAR PERFORMANCE | 23% |
MANAGER | Iain Stewart | 5-YEAR PERFORMANCE | 53% |
MANAGER START DATE | March 2004 | TOTAL EXPENSE RATIO | 1.6% |
BETA | 0.7 | YIELD | 3.7% |
VOLATILITY | 11% | MORE DETAILS | www.bnymellonam.com |
TOP 10 HOLDINGS | % |
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GlaxoSmithKline | 4.0 |
Vodafone | 3.8 |
Newcrest Minign | 2.5 |
ETFS Agriculture | 2.4 |
Norway 6.5% 2013 | 2.3 |
Smith & Nephew | 2.1 |
Deutsche Telekom | 1.9 |
RWC Partners | 1.9 |
US Treasury Bonds 2.5% 2029 | 1.9 |
ETFS Physical Gold | 1.9 |
ASSET ALLOCATION | % |
---|---|
Equities | 58 |
Fixed Income | 24 |
Cash and equivalent | 10 |
Commodities and derivatives | 6 |
Convertibles | 2 |
But there are two crucial twists on the pension-fund formula. The first is an unusual level of flexibility. Mr Stewart can invest in anything apart from properties. He points out that correlations between assets can flip unexpectedly. For example, gold tracked commodities right through the 1980s and 1990s, but turned into a 'safe haven' asset in late 2008. A sizable gold position was one reason why he managed to produce a 4 per cent return in 2008.
The other twist is the use of derivatives. Mr Stewart does not short stocks - Newton says that shorting damages its relationships with companies - but he sometimes buys put options on, say, the FTSE 100 index to offset losses in falling equity markets.
Newton Real Return is likely to undershoot a sharply rising market as a result and that was the case last year. The extreme flexibility of the mandate also means investors are completely in Mr Stewart’s hands: manager risk has, to an extent, replaced market risk.