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Performance commentary

Q4 delivered a strong return for the strategy, beating its LIBOR +4 benchmark, and for the 12 months we delivered a double-digit return, and this was against a backdrop of very strong market conditions. Turning then to the quarter, what worked, what didn’t? Well, the return-seeking core really did its job, particularly within the equity section of the portfolio, with some of the big holdings in the areas of technology, some of the more industrial, cyclical names and insurers doing extremely well. The only area of weakness, particularly, was in aerospace and defence, which is still very much an area that we’re positive on, very much from a thematic basis. Elsewhere within the return-seeking core, emerging-market debt did well as did high yield, and particularly within the alternatives some of the renewable holdings also did well. What did least well over the period was in the stabilising layer. Government-bond yields went up, i.e. government bonds sold off; we haven’t actually got a lot of duration [sensivitity to changes in interest rates] but that was a negative and some of the actual protection that we’ve got in the portfolio for that rainy day obviously wasn’t needed and was detrimental to the total return of the portfolio. On the other side of the stabilising layer, the gold in the portfolio did extremely well, which we’re pleased to say, and that’s an area that we have been adding to over the course of the year.

Annual performance to quarter end (%)

From Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018
To Dec 2015 Dec 2016 Dec 2017 Dec 2018 Dec 2019
BNY Mellon Real
Return Fund
1.09 4.01 2.49 -0.10 12.06
Performance benchmark 4.55 4.46 4.33 4.64 4.74

Source: Newton, as at 31 December 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.

The objective of the Fund is to achieve a rate of return in sterling terms that is equal to or above a minimum return from cash (1-month GBP LIBOR) + 4% per annum over five years before fees. In doing so, it aims to achieve a positive return on a rolling three-year basis (meaning a period of three years, no matter which day you start on). However, capital is in fact at risk and there is no guarantee that this will be achieved over that, or any, time period. The Fund uses 1-month GBP LIBOR + 4% per annum over five years before fees as a target set for the Fund’s performance to match or exceed. The authorised corporate director (ACD) considers 1-month GBP LIBOR +4% per annum over five years before fees to be an appropriate target because the ACD believes in typical market conditions that it represents a target that will be equal to or greater than UK inflation rates over the same period and is commensurate with the Investment Manager’s approach.

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.

Activity review

So in terms of activity, as we went into the fourth quarter, we were rather apprehensive as to how the year end would play out, and very much focusing on some of the signals in terms of the PMIs [purchasing managers’ indices], what was going on in terms of economic data, which we actually saw starting to stabilise, particularly in Europe, US and also in China. And with the prospect of some sort of positive result in the UK election, i.e. certainty to the debate around Brexit, as well as the US presidential election and talks around China and US trade tariffs, that delivered a very strong runway for risk assets into the year end. And on top of that, a lot of investors, generally speaking, had been underweight risk assets so there was a lot of catch-up to do. So on that basis, we did actually expose the portfolio to more risk in the fourth quarter and we did it by selectively adding to some securities – UK domestics being one of them and also in the area of financials and also EMD [emerging-market debt], we’ve continued to add to that in the portfolio, which is supported by a weaker US dollar, which we’re starting to see. In terms of currency exposure, having been adding to sterling over the course of the year, we closed out our underweight sterling, and sterling rallied in the fourth quarter so that was a good thing to do. And as you know, we hedge all of our overseas assets back into sterling by default, and only have overseas currencies when we have a strong currency view.

Investment strategy and outlook

So turning to our outlook then, for at least the first few months of this year and perhaps into the first quarter and the first half, we are more constructive about the backdrop, largely because policymakers do seem to be pretty dovish and the Fed [US Federal Reserve] is prepared to run the economy on hot and allow inflation to rise perhaps a little bit, and at the same time, with the US presidential election year coming up, generally that’s always been a good time for risk assets. But what I would say is that the structural trends which we’ve been talking about for many years now, particularly the over-indebtedness, demography, the whole disruption from technology, as well as what is going on in terms of financialisation in the asset markets, generally speaking does pose risk and provides quite a fragile backdrop where valuations are pretty expensive, so you do need to be highly stock-selective, which obviously we are. So 2020, we think it’s going to be quite an eventful year, certainly with volatility, and we are seeing obviously geopolitical events unfold in places like Iran and that will actually probably provide an opportunity to add to risk assets if we get more volatility in equity markets.

Important information

This is a financial promotion. The opinions expressed in this document are those of Newton and should not be construed as investment advice or any other advice and are subject to change. This video is for information purposes only and does not constitute an offer or solicitation to invest. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those countries or sectors. Please note that portfolio holdings and positioning are subject to change without notice. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation.

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