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 Rob Morgan, Investment Analyst, looks at the Newton Real Return Fund.
It's a difficult environment for cautious investors in search of income. Measly interest rates have little chance of keeping pace with inflation, lean yields and high prices on government bonds have turned a traditionally safe investment into a riskier one, and the equity markets, whilst appearing relatively attractive, are prone to volatility. Obtaining a 'real' return – i.e. growing your money ahead of the rate of inflation – is certainly a challenge.
So for cautious investors the Newton Real Return Fund could appeal. The fund aims to provide above-inflation returns over the long term with lower volatility than the stock market. To do so Iain Stewart and James Harries, the fund managers, invest in shares, bonds and cash while also having the flexibility to invest in commodities, currencies and derivatives, depending on their views.
Presently, just over 57% of the fund is invested in equities, a relatively concentrated portfolio of large, well-financed global companies with strong balance sheets. Stock selection here has been mixed in the past few months with holdings in UK utilities and German chemicals company Bayer performing well, whilst telecoms firms Telkom Polska and KPN fell in value. Exposure to gold miners Barrick Gold and Newcrest also detracted.
The equity element of the portfolio failed to keep up with global markets in the second half of 2012 as more economically sensitive areas such as financials fared best. However, the managers believe these are now poor value and are sticking to their more defensive positions. They took the opportunity to sell the small number of positions they did own in this area, Norwegian bank DnB Nor and Aberdeen Asset Management.
Equity exposure is also partially hedged using derivatives. They are used to dampen the volatility of the fund's equity positions, however they can increase risk. There is also exposure to the US dollar, which tends to do well when stock markets fall, so this could help reduce volatility too, as should the fund's 10% cash position.
In bonds the managers see the number of opportunities diminishing. Around 28% of the portfolio is invested here split roughly equally between government and corporate debt. The managers are avoiding bonds issued by banks, believing those of industrial firms offer better security of capital. In government bonds they currently hold those issued by the UK, US, Norwegian and Australian governments.
Despite unexciting recent performance, long term returns remain strong with the fund up 83.8% since launch of the IMA Absolute Return sector in May 2005 versus 48.6% for the sector, although past performance is no guide to the future.
|01/02/2008 to 02/02/2009||02/02/2009 to 01/02/2010||01/02/2010 to 01/02/2011||01/02/2011 to 01/02/2012||01/02/2012 to 01/02/2013|
|Newton Real Return Fund||1.5%||10.4%||10.0%||2.5%||4.2%|
|IMA Absolute Return||0.2%||8.9%||2.9%||-0.6%||4.3%|
*Source: Lipper 03/05/2005 to 01/02/2013.
With exposure to a range of asset classes I believe this fund is a good core holding for the long term and should be relatively resilient in testing times. However, it is to likely look pedestrian against a backdrop of buoyant equity markets. It remains on the Wealth 150 list of our favourite funds in each sector.
|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%|