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So quarter three was quite a noisy quarter in terms of events in the marketplace, what with the trade war between the US and China, further discussions and non-resolutions around Brexit, Italian politics, to name just a few, as well as obviously protests in Hong Kong, and markets were quite choppy. The strategy itself generated a positive return over the period and delivered that without too much volatility and beat the LIBOR+4 performance objective. But I do think Q3 really needs to be put in the longer-term context and the story that we’ve been telling really ever since we think markets actually probably peaked in the early part of 2018. And as you know 2018 was all about the year of transition, going from QE [quantitative easing] to QT – quantitative tightening – and also at the time there was expectation that rates were going to go up. Now since that time, there’s been a huge wealth of data to suggest that very much the global economy is on the wane and equity markets are still at pretty high levels, but bond yields are suggesting that the economy is slowing down in quite a significant way.
So what has the strategy achieved in that period and how has it done it? Well, by delivering that positive return, it’s both the return-seeking core as well as the stabilising layer that actually has generated positive returns, and that’s what you’d expect in a volatile period. Now in fact equities were a negative contributor – whilst we had very good stock selection amongst the areas of more defensive businesses, whether it’s utilities, or whether it’s in the areas of media for example, the areas that actually suffered were more of the Asian-related names, particularly around Hong Kong, some of the insurers that we’ve got in the portfolio.
But aside from equities, as you know what we’ve been doing is really diversifying into other return streams because we’re really trying to get more exposure to other asset classes and away from equities where we see the bigger risk, and so that’s in the area of alternatives, it’s in the area of infrastructure. And additionally we’ve got some CoCos in the portfolio and also high-yield bonds and emerging-market debt, so barring more recently the high-yield area, most areas have actually positively contributed over the quarter. Now in the stabilising layer, duration from government bonds in the developed markets has continued to add value, and that’s been a feature over this year to date, as has gold where we’ve significantly added to gold, from around about 2% at the start of the year to around about 11% at the end of the quarter. So those are the contributors to performance.
Annual performance to quarter end (%)
|From||Sept 2014||Sept 2015||Sept 2016||Sept 2017||Sept 2018|
|To||Sept 2015||Sept 2016||Sept 2017||Sept 2018||Sept 2019|
|BNY Mellon Real
Source: Newton, as at 30 September 2019, Newton Institutional Shares 1 (Accumulation) share class (ISIN: GB00B01XJC27). Fund performance calculated as total return including reinvested income net of UK tax and charges, based on net asset value. All figures are in GBP terms. The impact of an initial charge (currently not applied) can be material on the performance of your investment. Further information is available upon request.
Past performance is not a guide to future performance. Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested. This Fund invests in international markets which means it is exposed to changes in currency rates which could affect the value of the Fund. Derivatives are highly sensitive to changes in the value of the asset from which their value is derived. A small movement in the value of the underlying asset can cause a large movement in the value of the derivative. This can increase the sizes of losses and gains, causing the value of your investment to fluctuate. When using derivatives, the Fund can lose significantly more than the amount it has invested in derivatives. Investments in bonds/money market securities are affected by interest rates and inflation trends which may negatively affect the value of the Fund. You should read the Prospectus and the Key Investor Information Document (KIID) for each fund in which you want to invest. The Prospectus and the KIID can be found on
our Fund literature page.
What have we been doing in terms of activity? Well generally we have been buttoning down the portfolio and taking risk off the table because we do think that in this environment the global data doesn’t look that great. We’re going into the next earnings season, and whilst a lot of our peer group – other investors in the marketplace – are also pretty cautiously positioned, we believe, we don’t see that much silver lining out there to make us more positively inclined. So our net equity exposure, for example, is at one of its lowest levels. Our government bond duration at the developed-market level is around about 2.4%, and then we’ve got the gold in the portfolio, but the duration from the bonds isn’t as high as it used to be, and we have been taking some profits in gold as well. And in the other areas like alternatives and infrastructure and emerging-market debt we’re not taking significant risks.
So we do believe the portfolio is pretty locked down, and the risk is that perhaps there is a trade deal done before the year end, perhaps there is some resolution behind Brexit, or perhaps even we see economic data starting to stabilise and that is the risk that on the upside, we want to try and hedge against in case we’re wrong about the backdrop. And so what we’ve actually done in the portfolio is that we have bought some call options out to January now on the S&P, which mitigate some of the short futures that we’ve got in the portfolio for protection.
Investment strategy and outlook
So we’re very alive to what’s going on in the global economy, we’re looking at the data points, we’re looking at companies’ earnings, and we’re really trying to see whether particularly the US consumer is coming under pressure, as well as what that would mean for labour and wages, because obviously the US consumer is the largest part of the US economy. We aren’t particularly positive on what’s going on in China, although they’re trying to stimulate their economy, but again we’re watching to see whether another Shanghai Accord 1.0 that was delivered in 2016 can actually be repeated in 2019 and we do think time is running short. So in that regard we’re open to opportunities, we’ve got some really good individual ideas in the portfolio, which are working very well, and year to date we’ve actually generated a very decent return. But we do think that now is a time to be more cautious, but perhaps to reflect that caution with upside capture through various call option strategies that we’ve got in the portfolio.
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