Absolute return funds aim to make positive returns in all market conditions and preserve investors' money. Very few have actually done so., but one that has lived up to its billing is Newton Real Return Fund - an IC Top 100 Fund - run by Iain Stewart. During the depths of the financial crisis, when stock markets plunged 30 per cent or more and the average absolute return fund lost 3.6 per cent, this fund returned more than 4 per cent. It has stayed ahead of the average absolute return fund in each of the last five years, over certain periods leading the pack.
Mr Stewart attributes this success to good old-fashioned stock-picking. "We mainly buy assets such as equities and debt long-only, while our peers use more derivatives. We also mostly own our assets directly (rather than via funds) so can be very selective with regard to specific securities, and flexible.
"We don't have a model telling us what to do and we don't make complex forecasts. We are much more traditional in looking to where there is value, so not to suffer valuation risk as we are trying to make decent total returns. We take a thematic approach and our analysts assess the risks of securities, businesses and economies.
"Such an environment makes it doubly important to run active, flexible and committed portfolios which can be focused on coupons, cash flows, earnings and dividends that our thematic work identifies as being relatively attractive or insulated from structural headwinds," he adds.
Looking ahead, Mr Stewart feels there needs to be a balance between generating returns and an awareness of inherent market risks. "As long as structural issues remain unaddressed, the focus of policy is likely to remain firmly reflationary," he explains. "There will therefore be more global stimulus measures before this process is over, and these can and will produce sharp reactions in the markets. And although governments would like to see inflation higher than bond yields this is dreadful for savers who will see their wealth eroded."
He says a wholesale move into riskier but higher return assets may not be appropriate. Instead, he has mixed risk assets and cash "because I think we are going to see some more volatility." Nearly half of the fund is invested in equities, while nearly a quarter of the fund is in cash.
Mr Stewart says this is probably the hardest period he has had to deal with since he started running Newton Real Return Fund in 2004. "We had a clear view of what might happen during the credit crisis but now we have to have risk on and risk off positions," he says. "This makes it difficult to make money while still protecting capital."
| Iain Stewart CV |
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Iain Stewart is manager of the Newton Real Return fund as well as a significant portion of Newton's pooled balanced portfolios. He is an is an investment leader in the global funds team and a member of the macro strategy group, with particular responsibility for co-ordinating the development of Newton’s global investment themes. He has worked at Newton since 1985. Mr Stewart is an associate member of the UK Society of Investment Professionals (UKSIP), and holds a research PhD from the Ministry of Agriculture, Fisheries and Food. |
What advice would he give to a private investor facing such markets? "Diversify as much as possible because the range of possible outcomes is quite diverse, and focus on certain issues, for example, currencies," he says. "One of the tools of policy is devaluing these versus other economic blocks so in a money-printing environment you have to be very wary. We still have some exposure to gold directly and via the equity markets. It has held up well but the mining shares have not, though we are hanging on to these as a hedge against further monetisation. Meanwhile we are avoiding financial sector positions because we are still quite negative on banks - there are genuine risks of insolvency."
The fund gets direct gold exposure via ETFS Physical Gold and mining shares include US listed Newcrest Mining, both of which are in the top ten holdings with each accounting for 2.1 per cent of assets.
But it's not all doom and gloom. Mr Stewart admits there are some investment opportunities to be found in higher quality areas of equity markets. "While the current prospects in aggregate look distinctly unappealing, they are also dynamic," he says. "Volatility should continue to provide opportunities for active and flexible investors to add value. We continue to believe that the subdued outlook for markets as a whole disguises some attractive prospects, particularly in the more stable, better quality parts of equity markets. These are overlooked as being too dull in risk-on market phases but their robust business models should mean that they prove resilient against a potentially volatile economic and market backdrop."
He says that "decent companies" which have products people want to buy such as food, pharmaceuticals and telecoms are quite reasonable in some areas. Portfolio holdings include pharmaceuticals groups GlaxoSmithKline, Novartis and Roche which he says relative to history are good value. This is also the case with agricultural and healthcare company Bayer and publisher Reed Elsevier.
"Some continental telecoms have suffered a bit as they have not handled regulation very well so are reasonably attractive and have big yields, examples including Deutsche Telecom and Denmark's TDC. Quality as a theme has underperformed for many years but is now performing as investors realise that large-cap, stable companies which pay decent dividends are a good place to be in uncertain conditions," he adds.
