Newton Real Return: taking shelter from the storm

This fund's defensive nature has led to sluggish returns lately, but it could provide useful diversification in a portfolio.

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  1. Rob Morgan

Investors could be forgiven for losing patience with targeted absolute funds; sluggish performance against a backdrop of surging equity markets in 2016 and 2017 did little to inspire. Yet the events of 2018 hint at a more fertile environment for investments in this varied sector.

One of our preferred ones, and part of our Foundation Fundlist, is Newton Real Return.  It invests in a diverse portfolio of assets, aiming to beat the return on cash by 4% a year while limiting the scope for losses. However, prioritising capital preservation is an aspiration rather than a promise, and the fund can fall as well as rise in value.

The fund’s defensive positioning has resulted in lacklustre performance over the past three years. Although it has preserved capital the fund has made little headway owing to the managers’ conservative stance stemming from their economic views. For some time they have been watchful of the actions of central banks, concerned about the unwinding of quantitative easing (QE) and rising interest rates.

Loose monetary policy in response to the Global Financial Crisis, they argue, has had the effect of lifting asset prices, and that if the relationship between asset prices and central bank liquidity holds true it likely means in markets. They have also been wary of the impact a reduction in Chinese economic stimulus would have globally and worry that a renewed escalation of trade disputes remains a real possibility.

Despite the recent pickup in volatility, they believe the current prices of many assets do not provide much reward for the elevated levels of risk. For now they prefer to bide their time and wait for more favourable opportunities to increase commitment to riskier assets.

Indeed, equity exposure was further reduced in November 2018 with the weighting to these and other ‘return-seeking’ assets such as corporate bonds falling to around 40% after accounting for direct hedges. In parallel, exposure to assets designed to conserve capital increased, notably via the purchase of German Bunds and long-dated US Treasury bonds.

As such the fund briefly benefited from a change in investor sentiment towards the end of 2018. Holdings in US Treasuries rose, as yields fell, and the fund’s ‘stabilising layer’ of derivatives helped protect from equity market falls. Among the portfolio’s equity holdings, defensive, income-generating stocks such as Novartis and Eversource Energy fared well, and infrastructure holdings such as International Public Partnerships investment trust were resilient.

Our view

We are not surprised to see the managers sticking to their guns to remain defensively positioned, and believe the focus on longer term trends and capital preservation could mean the fund provides useful diversification in a portfolio.

If the manager’s expectation for an environment of low returns and high volatility prevails then the fund could grind out decent returns, although if equities rally, and in particular more growth-orientated sectors do well, then the fund would likely continue to lag. We believe it is well managed and it remains part of our Foundation Fundlist of preferred investments across the major sectors.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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