Newton Real Return - ready for risk off

Kate Marshall | Thu 27 September 2018

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• Fund invests in multiple assets to try to offer protection against stock market volatility
• The team hold a cautious view of the world and the fund is positioned accordingly
• We view the fund as an excellent choice for a more conservative portfolio

Our view

Deciding where to invest in today’s uncertain world can be a daunting prospect. A fund such as Newton Real Return may appeal to those who are unsure how to allocate their capital for long-term growth, but wish to limit the volatility associated with investing purely in the stock market.

The fund invests in a number of key asset classes, such as shares and bonds, aimed at growing wealth over the long term. In addition it provides exposure to some alternative investments, such as infrastructure, commodities, and cash, designed to diversify and stabilise the fund. Importantly the decisions are made by an expert portfolio manager on investors’ behalf.

In our view Newton Real Return could provide a conservative element to a wider investment portfolio. Iain Stewart, the fund’s lead manager, has the support of Newton’s wider team of analysts and over the long term he has built a strong track record. His focus on a diversified range of assets, including a core of companies that could be well-placed to withstand a variety of economic conditions, means the fund has tended to offer some resilience during periods of market turbulence. Please remember past performance is not a guide to future returns.

The fund currently features on the Wealth 150+ list of our favourite funds at the lowest ongoing charge. The Vantage platform fee of up to 0.45% p.a. also applies.

Past performance is not a guide to future returns. Source: Lipper IM to 30/06/2017.

How is the fund invested?

Against a backdrop of low growth, low inflation, and high levels of debt, Iain Stewart and the investment team at Newton have long held a cautious view of the world.

In response to the damage caused by the 2008 financial crisis, governments and central banks across the globe undertook huge quantitative easing programmes. Huge sums of money entered the financial system, which eventually led to rising asset prices (including those of shares and bonds). In the team’s view, these higher prices have not been justified by strong enough economic growth and, as valuations are also at all-time highs, many asset prices do not provide enough potential reward for the level of risk investors face.

The fund has therefore remained conservatively positioned in order to provide some shelter in the event of significant market setbacks. The equity portion is biased to high-quality companies with stable earnings and in sectors with more defensive characteristics. Consumer goods companies, such as Reynolds American and Diageo, and healthcare firms, including Roche and Novartis, are well-represented in the portfolio.

This type of company was shunned by investors in the latter half of 2016 in favour of companies in more economically-sensitive industries, and this held back the fund’s performance. However, the shares of companies in more defensive sectors have recovered so far this year to the benefit of the fund.

Several technology companies, including Microsoft, SAP and Samsung SDI, have also recently performed well and the manager has taken the opportunity to take profits from these investments. The proceeds have been used in part to initiate new investments in US consumer goods company Newell Brands and Indian financial services provider Vakrangee.

A number of other investments that held back returns towards the end of last year, including US government bonds and gold mining companies, have also returned to form in 2017. The manager recently took some profits from the latter, but reinvested the cash into physical gold in order to maintain exposure to the yellow metal.

Iain Stewart also started to build the fund’s exposure to emerging market bonds over the past year, although they remain a relatively small portion of the portfolio at present. These bonds are considered higher risk than those issued by developed-market governments, but offer higher yields to compensate. Mexican government bonds, for example, were added to the fund following the US Presidential election last November. Donald Trump’s tirade against Mexico led to a period of weakness for these bonds and the manager took advantage by investing at lower prices (and higher yields).

The manager also makes use of his flexibility to use derivatives to try and shelter capital during volatile periods, although it can also increase risk. The US stock market has performed strongly in recent years, which has pushed valuations higher, and Iain Stewart believes it could be vulnerable to a setback. In the event, he has made an investment that could provide some protection, although this has not paid off over the past year as US share prices have continued to rise. Over the longer term we are confident the manager will use the tools available to him to the benefit of investors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.