Each week we highlight one of the funds from our Wealth 150 as our Fund in focus. The Wealth 150 represents what we believe to be the best funds across the major sectors. This week Mark Dampier, Research Director looks at the Newton Real Return Fund.
Improving economic data suggest the UK could finally be on the road to recovery. So far we have seen positive GDP (Gross Domestic Product) data, better manufacturing figures and evidence the service sector is alive and kicking. Meanwhile house prices have also been rising.
Despite the general optimism, James Harries, co-manager of the Newton Real Return Fund, remains relatively gloomy. His view is that we remain in a challenging world of excessive debt and experimental monetary policy. Our problems have not gone away and he believes economic growth remains anaemic at best. He feels we could even see new lows on bond yields - should investors' risk appetite dampen once more, demand for bonds could pick up, pushing up bond prices and causing yields to fall. James Harries also envisages short-term interest rates remaining low. This now seems more likely after Bank of England Governor Mark Carney issued 'forward guidance' stating that interest rates would remain at 0.5% until the UK's unemployment rate dropped to 7%. This is not expected to occur until 2016.
He believes there could be a realisation at some point that quantitative easing (QE) does not work. He feels it has distorted asset prices, with cheap money flowing into certain areas of the market, and this has led to a misallocation of investors' capital.
In line with his cautious views, the fund is conservatively positioned. Around 57% of the portfolio is invested in shares, with large, well-financed companies favoured. Conversely James Harries dislikes the financial sector, seeing many firms as unattractively-valued. A further 26% is invested in bonds, almost half of which is in Australian and Norwegian government bonds, with most of the remainder in higher risk, high yield corporate bonds (with a preference for bonds which are secured on the company's assets). Again the financial sector has been avoided. Elsewhere, 12% of the portfolio is held in cash alongside a small amount in gold. In addition the fund has the flexibility to use derivatives to help shelter some of the fund's capital during volatile periods; however this strategy doesn't always work and therefore can increase risk.
James Harries describes the fund as being "robust to a variety of outcomes". We believe the fund is well-positioned for more cautious investors who are looking to shelter and limit the volatility of their capital wealth, though there are no guarantees. Investors should note that the fund's relatively defensive positioning means it will lag during a stock market rally.
The fund aims to outperform cash (as measured by 1 month GBP LIBOR) by 4% per annum over 5 years before fees. Over the last 5 years the fund has successfully achieved this aim. It has also significantly out-performed its peer group over this period, rising 42.8% compared to 17.0% for the IMA Targeted Absolute Return sector, although past performance is not a guide to future returns.
|Annual % growth|
|August 08-09||August 09-10||August 10-11||August 11-12||August 12-13|
|Newton Real Return||7.21||13.21||10.47||1.27||5.21|
|IMA Targeted Absolute Return||3.26||3.28||4.03||-1.16||6.67|
Past performance is not a guide to future returns. Source: Lipper IM
We are currently undergoing the biggest experiment in history in terms of monetary and fiscal policy. In reality, no one can predict the final outcome. In my view, it is well worth having a fund such as this within your portfolio in the event things do take a turn for the worse. Please note, the fund's charges can be taken from capital which could increase the potential for the capital value to be eroded.
|Fund manager's initial charge||4.00%|
|HL saving on initial charge||4.00%|
|Net initial charge||0.00%|
|Fund manager's annual charge||1.50%|
|HL annual saving||0.25%|