Markets may have moved upwards since January, but geopolitics can change things very quickly. So it is always a good idea to have some protection built into your portfolio.
Good long-term record
Low volatility
Diversification
Portfolio ballast
Relatively new managers
Recent underperformance
If equity growth funds account for a substantial portion of your investments, then you should consider adding funds that are less correlated to equities and could provide ballast in rough markets, mitigate downside and protect your capital. Targeted Absolute Return funds are supposed to do this by making positive returns over rolling medium-term periods – regardless of market circumstances. However, few of these funds have managed to do this. But there are some notable exceptions such as Newton Real Return (GB00BSPPWT88).
This multi-asset fund invests in corporate bonds and equities for long-term capital growth, and alongside these holds investments that mitigate risk, reduce volatility and help to protect capital. This includes other major asset classes such as government bonds, property, gold and derivatives. The fund's managers have a lot of flexibility in terms of how they allocate assets, and can increase or reduce exposure to riskier assets according to their macroeconomic and asset allocation outlook.
For example, the fund currently has around 38 per cent invested in equities alongside a 13.5 per cent allocation to derivatives which protect against falling equity markets, according to data company Morningstar. This means that its net exposure to equities is just 24.5 per cent, because its managers have a bearish outlook. They think that the global economy remains under threat of deflation and equity market valuations have extended beyond reasonable value.
The fund has a good volatility record of 5 per cent a year over 10 years, versus 14 per cent for MSCI All Country World index and 8 per cent for Bloomberg Barclays Global Aggregate [bond] index. However, most of this performance was overseen by former manager Iain Stewart, who joined Newton’s multi-asset team in 1985, and ran the fund between 2004 and the end of 2018. It is now run by Newton’s real returns team led by Suzanne Hutchins, alongside Andy Warwick and Aron Pataki.
The fund aims to beat cash as measured by one-month London interbank offered rate (Libor), plus 4 per cent every year over a five-year period, with substantially lower volatility than equities. But its returns have recently been below those of its benchmark because of its cautious positioning, a result of its managers' bearish outlook and the equity hedges they have made.
However, over the long term the fund’s strategy has been successful and it has delivered positive returns in every calendar year since 2010. David Holder, an analyst at Morningstar, says: “[Recent] performance hasn’t met the fund's objective, but [the recent strategy] hasn’t been tested through a [bear] market where it is more likely to add value. We take comfort in the longer-term record.”
Despite Mr Stewart's departure the team that runs the fund continues to be well resourced. Ms Hutchins was previously a deputy manager on Newton Real Return, and she and Mr Pataki run offshore funds with similar strategies to this one. Mr Warwick joined from BlackRock, where he was co-manager of the BlackRock Dynamic Diversified Growth (GB00B823TT41), and manager of the BGF Flexible Multi-Asset (LU1822773989), BlackRock Balanced Growth (GB00B7XQBS82) and BlackRock Balanced Managed funds. He has 13 years experience of running multi-asset funds, in particular cross-asset-class research, macro input and portfolio construction.
They are supported by a team of analysts and Mr Stewart still works with the real return team on its strategy.
So, if you understand what the fund invests in, and it doesn't duplicate your other investments, making your portfolio too concentrated on one type of asset, it could be a good way to limit your portfolio's downside during volatility. Although Newton Real Return's longstanding manager has left, it continues to follow a similar strategy implemented by a team with a proven track record, and is well positioned to mitigate choppy markets. Buy. TL
Newton Real Return (GB00BSPPWT88)
PRICE: | 117p | MEAN RETURN: | 0.19% |
IA SECTOR: | Targeted Absolute Return | SHARPE RATIO: | -0.07 |
FUND TYPE: | Open-ended investment company | STANDARD DEVIATION: | 9.18% |
FUND SIZE: | £7.2bn* | ONGOING CHARGE: | 0.7%* |
No OF HOLDINGS: | 141 | YIELD: | 3.4%* |
SET-UP DATE: | 1/09/93* | MORE DETAILS: | newtonim.com |
MANAGER START DATE: | 2/01/19* |
Source: Morningstar as at 25/03/19, *Newton Investment Management
Performance
Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) |
Newton Real Return | 7.05 | 6.64 | 14.38 | 60.26 |
1-month GBP Libor +4% | 4.67 | 13.98 | 24.52 | 55.96 |
Source: FE Analytics as at 25/03/19
Top 10 holdings as at 28/02/19 (%)
Government of USA 3.375% 15/11/2048 | 14.6 |
iShares Physical Gold ETC | 4.4 |
Government of USA 3% 15/02/2049 | 3.7 |
Government of Australia 3% 21/03/2047 | 2.3 |
Invesco Physical Gold ETC | 2.1 |
iShares JPMorgan USD EM Bond Ucits ETF | 2.1 |
Canada Housing Trust No. 1 2.35% 15/06/2027 | 2.0 |
ETFS Physical Gold | 1.9 |
Novartis | 1.9 |
Government of Australia 3.75% 21/04/20137 | 1.8 |
Source: Newton Investment Management
Net asset allocation as at 28/02/19 (%)
Cash/derivatives | 22.0 |
Equities | 24.5 |
Bonds | 37.2 |
Other | 16.3 |
Source: Morningstar