Marine science may not be the usual background for a multi-asset fund manager, but for Iain Stewart, head of the Real Return team at Newton Investment Management, it has provided a different perspective on asset management.
After completing his PhD at the Ministry of Agriculture, Fisheries and Food, he met Stewart Newton, the firm’s founder, and joined as his assistant. “Maybe that opportunity wouldn’t be open now but he was – and the firm then was – quite open to people coming from all sorts of backgrounds, as they figured you could learn the basics very quickly,” he recalls.
“It intrigued me, I liked the idea of being responsible for some financial assets and I’m interested in how markets work, how economies work. If one can apply a slightly different framework to that to look at it differently, which I do as a scientist, that can be very beneficial.”
Having joined Newton in 1985, the manager can remember multi-asset’s popularity dropping in the 1990s and 2000s, “as the trend was towards specialisation”.
“By the time we got to the late-1990s, I was feeling like a bit of a dinosaur in that there weren’t a lot of people running multi-asset any more.”
In the wake of the technology bubble collapse, Mr Stewart says: “We became convinced the world was changing in terms of returns. We couldn’t expect to have this phenomenal period any more and returns were much more likely to be lower than people had got used to and [there was] likely to be more volatility around that.
It was tough to hold them but we felt the backdrop was still appropriate for holding gold and that has helped us a lot in the current phase“It made sense to us to think more about attaching ourselves to absolute returns rather than index returns. But we felt the approach that we’d used in the balanced funds for the previous 20 years or so was really valid: running a single portfolio and thinking about the characteristics of the assets and not just asset allocation. Actually thinking about what sort of assets we wanted; having a framework of the world in terms of trends, themes and what’s happening; and buying the right kind of securities,” he explains.
Utilising an existing equity fund from Newton’s Intrepid range, the vehicle was rebadged as the Absolute Intrepid fund in 2004, before being renamed a few years later with its current monicker, the Newton Real Return fund.
“In this environment, you want to think as much about not losing money as making it. One of the best ways to do that is to give our team a target that only goes up, so the mindset changes from relative to absolute [return].”
The fund started with assets of £13m, but it now holds approximately £13bn. As the manager puts it: “[The strategy] has been reasonably successful in terms of attracting money.”
Having launched during the “overhang” of the technology bubble, the fund could operate “with a reasonable amount of risk”. However, the team “got very worried about what was going on in the world – way too early, really – in 2005-06 and were positioned for that in 2007, so [we] had a strong period during the credit crisis and beyond. We actually made some money in 2008.”
Instead, the most challenging time for the strategy was the end of 2012, when equities rerated substantially in the wake of further US quantitative easing and Mario Draghi, president of the European Central Bank, vowing to do “whatever it takes” to preserve the eurozone.
But Mr Stewart notes the more volatile markets in the past year have helped the Real Return team “distinguish ourselves again”.
“We’ve again been able to show the fund behaves quite well in periods of stress, preserving clients’ capital and taking advantage of difficult climates,” he says.
Given current volatility, it’s unsurprising absolute return funds are a popular choice, with Targeted Absolute Return ranked the best-selling sector for six of the eight months to August 2016, according to the Investment Association.
Mr Stewart points out: “In the early part of the last decade nobody could really understand why you’d want an absolute return fund. By the time they got to 2009-10, they could see quite clearly and, since then, everybody wants one.”
He continues: “A lot of funds have been created and they do things in very different ways, this is not a homogenous sector. Many of them are more complex, more quantitative, more systematic and, perhaps, maybe even more like hedge funds, and they claim to generate returns in all market states. We do not do that. We have not discovered some systematic way of harvesting returns from the financial system in a market-neutral way.”
The portfolio includes a section of core, return-seeking assets, which can vary in terms of the assets held, their characteristics and how large the layer is relative to the whole portfolio.
“This is the part that is going to generate the return for us in the long run. What we can be absolutely sure about is this core is going to be volatile because it is in liquid assets and they are revalued every day,” he says.
Around this, the team builds an “insulating layer” that holds new and different assets, which varies in size over time. Using the analogy of a car tyre he explains: “If we felt the outlook was really good then we might be operating with a low profile but if it’s bumpy then we want a lot of rubber around us to insulate the occupants.”
More recently the strategy has had “quite a lot of rubber” around it, which meant “our returns have not looked that attractive compared to some of our competitors”.
One of the holdings in the fund that has proved more problematic in recent years has been the allocation to gold, currently about 12 per cent of the portfolio.
“Through the credit crisis it proved pretty good. We should have traded the exposure much more after that but we felt policy would remain loose and we didn’t think we’d get much growth, policymakers would have to stimulate more and currency devaluation would be an issue,” he explains.
“In that environment investors might want a real asset that isn’t being printed and is something outside the financial system. We were wrong about that with regard to gold because it peaked early and has been selling off. It has been difficult for us as we kept exposure to gold mining stocks, which were having the double whammy of a declining gold price and rising costs.”
But the benefit of long-term investing means that while the holdings “hadn’t been a very good hedge for many years”, they started to improve through 2015 and 2016.
“It was tough to hold them but we felt the backdrop was still appropriate for holding gold and that has helped us a lot in the current phase.”
For Mr Stewart, patience is certainly a virtue in the current low-return, low-interest-rate world.
“We’ve had an unprecedented situation where policymakers have used financial assets as their main tool of policy. That’s not really [succeeded] – there’s a gap between expectations and prices and what is happening in the real economy.
“We’d be better to wait for that to close rather than buy assets on high valuations. Being patient is important but it is difficult in fund management because you’re charging clients to be a custodian of their money and to say, ‘I’m not going to do very much’, is not really an answer. There is a great pressure for us to do something and we’re worried that by doing something we could incur more risk.”
Mr Stewart highlights the importance of a good team both on the strategy and also in the wider business, with input from specialists in asset classes and regions. The team is “bearish about some developments in the world”, and while it is still finding ideas, “it’s really a price change that would make us more optimistic as investors”.
“The backdrop changes slowly but prices can change rapidly; that would transform the outlook and we could apply these ideas and give ourselves a better opportunity to provide decent returns.”
