Lesson 1: Be Ready for a Range of Outcomes

The fast-changing and unexpected events of 2020 have taught us that you need to be as flexible as possible when managing a portfolio, in order to deal with a range of scenarios. Although arguably many of the fragilities that were exposed were already in evidence prior to the pandemic, during the first quarter of 2020 we experienced the second-fastest bear market in history. In response, we saw an equally historic coordinated global effort from central banks and governments to offset the negative impact of the virus.

Having confidence and a deep understanding of what is held in a portfolio pays off in such conditions. When the force of the repercussions of the pandemic hit markets in March, coupled with a simultaneous oil-price shock, it would have been easy to be wrong-footed. It was vital to be able to quickly assess the implications of the backdrop and identify the winners versus the losers. For example, sectors such as technology were Covid-19 winners as businesses benefited from the enforced lockdowns by increasing their subscriber base. Other areas such as travel and leisure were hard hit, and it was important to avoid those areas which were in the eye of the storm. Those companies with strong brands were able to strengthen their competitive position and were less affected by a temporary fall in demand; indeed, it was a matter of ‘survival of the fittest’.

Lesson 2: Keep Calm and Carry On

The events of 2020 have shown how interconnected the world has become. When looking at investments, it is important to accept that there will be further surprises and more uncertainty to come. The speed with which policymakers took action with a combination of monetary and fiscal stimulus on an unprecedented scale should give some reassurance, provided the decision makers remain alert. However, as March showed us, the situation can change quickly and savagely as different financial assets become highly correlated. There are times when it is too late to act, and a portfolio needs to be structured to prepare for the unknown. The ability to embed some downside protection and make a careful, measured assessment of the most effective tools to implement is invaluable.

Five lessons learned in 2020 - Lime tea

Central banks are likely to remain influential for the foreseeable future. This is an important factor to acknowledge when constructing a portfolio as there will be times when participation in market upside will make sense. There will be other times when the prevailing risks take center stage and a more sizable protective layer will be necessary to cushion on the downside. The pandemic has been a sharp reminder of how common risks affect us all globally and that surprises can come from left field, so it is key to consider all angles when investing and not be too narrow in our vision.

Lesson 3: Invest with Purpose

Arguably, this is more of a reminder than a lesson for us as purposeful stewardship of our clients’ assets has been central to our investment philosophy since our inception in 1978. However, the pandemic has put the spotlight on environmental, social and governance (ESG) issues, which are increasingly important in the mix when considering investment opportunities. The global economy is currently going through a series of complex changes in areas such as climate, health and technology. We have had to stop and think not just about how we are treating our planet, but also about social and governance aspects associated with how companies or other entities are run.

We believe these aspects should be embedded in an investment process and considered thoroughly as part of the fundamental analysis of individual holdings; indeed, they will be increasingly reflected in a security’s valuation. It is not a question of why you should integrate ESG issues; it is more a question of why you would not, as without this information you have an incomplete understanding of the factors that may influence financial outcomes. ESG is not a label; it is finance 101.

ESG factors are merely a different set of inputs whose materiality will depend on the sub- industry, the security-specific situation and the time horizon. They are part of a ‘mosaic’ of information to help create a full picture of an investment opportunity, which will enable active, engaged investors to do the best job possible.

Sphere

We have had to stop and think not just about how we are treating our planet, but also about social and governance aspects associated with how companies or other entities are run.

Lesson 4: Big Government Is Here to Stay

The scale of monetary-policy intervention in response to the Covid-19 pandemic far exceeds that witnessed in the aftermath of the 2007-8 global financial crisis. One key difference this time is that governments have loosened fiscal policy at the same time: the central-bank ‘put’ is alive and well. Monetary stimulus combined with fiscal injections may eventually give rise to price inflation which exceeds central bankers’ expectations. This has implications for investment portfolios.

There are also repercussions for personal freedoms and the social contract between individuals and governments. There are strings attached from the rescue packages implemented, although it seems that there is currently a willingness to accept the role of bigger government in managing economies.

From an investment perspective this new era is likely to be very different from the previous 30 years. If inflation surges, traditional correlations between equities and bonds may break down: inflation will naturally eat into fixed-income returns, but rising yields can make the stocks of those companies with higher debt levels look less attractive compared to ‘safer’ securities. There is therefore a need to be highly selective and mindful of the impact of greater state intervention which may favor national champions at the expense of those companies with a more globalized approach. Moreover, in such an environment, the appeal of real assets such as gold, which cannot be debased by central banks, increases.

Lesson 5: Future-Proof Your Investments

Against a backdrop that is likely to be unpredictable and volatile, it is important to use the full range of investment tools available, with an eye to maximizing liquidity. Government bonds may not be the place to be in 2021, although they have served an effective role in an environment of falling yields. This may necessitate the use of different investment instruments which may have a comparable risk/return profile, enabling them to play a similar role within a portfolio context.

The history of multi-asset investing has shown that different asset classes pull their weight amid the shifting sands of the market backdrop. An asset’s contribution to portfolio returns is largely a function of sound analysis of fundamentals and an ability to calibrate the appropriate level of exposure based on an assessment of the prevailing and future market conditions. In 2020 there were good examples of the value of harnessing a broad mix of return sources. Dialing up the Global Real Return strategy’s risk level within the equity portion of the portfolio through a combination of small and mid-cap index futures helped generate a solid return towards the end of 2020. Meanwhile, a patient approach to holding gold within the stabilizing layer paid off as the precious metal bounced back vigorously, having initially suffered in line with risk assets in the first quarter of the year.

However, although the Global Real Return strategy achieved a strong positive return in 2020, we are not complacent, and recognize the need to constantly evolve the portfolio and ’kick the tires’ of our existing investments.

Tool

Against a backdrop that is likely to be unpredictable and volatile, it is important to use the full range of investment tools available, with an eye to maximizing liquidity.

One common thread running through all these lessons is the need to be flexible and adaptable as the recovery path out of the pandemic will not be a straight line. While we would contend that the economy is in much better shape than during the aftermath of the global financial crisis, fragilities still exist, and we need to take stock from the lessons learned in 2020, not to mention heady valuations in certain areas of the market. As always, experience of different market cycles and the ability to reassess the outlook, should the evidence change, remains key.

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.

Newton Global Real Return Strategy – Key Investment Risks

  • Performance Aim Risk: The performance aim is not a guarantee, may not be achieved and a capital loss may occur. Strategies which have a higher performance aim generally take more risk to achieve this and so have a greater potential for returns to vary significantly.
  • Currency Risk: This strategy invests in international markets which means it is exposed to changes in currency rates which could affect the value of the strategy.
  • Derivatives Risk: 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 strategy can lose significantly more than the amount it has invested in derivatives.
  • Changes in Interest Rates & Inflation Risk: Investments in bonds/money market securities are affected by interest rates and inflation trends which may negatively affect the value of the strategy.
  • Credit Ratings and Unrated Securities Risk: Bonds with a low credit rating or unrated bonds have a greater risk of default. These investments may negatively affect the value of the strategy.
  • Credit Risk: The issuer of a security held by the strategy may not pay income or repay capital to the strategy when due.
  • Emerging Markets Risk: Emerging Markets have additional risks due to less-developed market practices.
  • Liquidity Risk: The strategy may not always find another party willing to purchase an asset that the strategy wants to sell which could impact the strategy’s ability to sell the asset or to sell the asset at its current value.
  • Shanghai-Hong Kong Stock Connect and/or the Shenzhen-Hong Kong Stock Connect (`Stock Connect’) risk: The strategy may invest in China A shares through Stock Connect programs. These may be subject to regulatory changes and quota limitations. An operational constraint such as a suspension in trading could negatively affect the strategy’s ability to achieve its investment objective.
  • CoCos Risk: Contingent Convertible Securities (CoCos) convert from debt to equity when the issuer’s capital drops below a pre-defined level. This may result in the security converting into equities at a discounted share price, the value of the security being written down, temporarily or permanently, and/or coupon payments ceasing or being deferred.
  • Counterparty Risk: The insolvency of any institutions providing services such as custody of assets or acting as a counterparty to derivatives or other contractual arrangements, may expose the strategy to financial loss.
  • Investment in Infrastructure Companies Risk: The value of investments in Infrastructure Companies may be negatively impacted by changes in the regulatory, economic or political environment in which they operate.

Newton Global Real Return Strategy – Returns to December 31, 2020 (%)

Annualized
Q4YTD1 Year3 years 5 yearsSince Inception1
Newton Global
Real Return
composite (gross)
6.99 10.7710.778.506.796.23
Newton Global
Real Return
composite (net)
6.799.959.957.705.995.44
Performance
benchmark
1.034.584.585.705.374.72

Newton Global Real Return Strategy – 12-Month Returns (%)

Dec 19 –
Dec 20
Dec 18 –
Dec 19
Dec 17 –
Dec 18
Dec 16 –
Dec 17
Dec 15 –
Dec 16
Newton
Global
Real Return
composite (gross)
10.7713.012.045.233.31
Newton
Global
Real Return composite (net)
9.9512.171.284.452.54
Performance
benchmark
4.586.366.175.204.55

Note: 1 Inception: July 1, 2009.

Performance is stated gross and net of management fees. The gross performance figures do not reflect the deduction of investment advisory fees. The client’s return will be reduced by the advisory fees and any other expenses it may incur in the management of its investment advisory account. The investment advisory fees are described in Part 2 of the adviser’s Form ADV, which can be obtained from the SEC.gov website or obtained upon request. Please see composite information at the end of this document. This is supplemental information to the GIPS® compliant information.

The strategy aims to deliver a minimum return of cash (one-month US-dollar LIBOR) +4% per annum over 5 years before fees. In doing so, the strategy aims to achieve a positive return on a rolling 3-year basis. However, a positive return is not guaranteed and a capital loss may occur.

Source: Newton Global Real Return composite, total return, income reinvested, in USD, December 31, 2020. Net of fees performance quoted with 0.75% annual management charges.

Five lessons learned in 2020 - Hero

Important Information
This is a financial promotion. This document is for institutional investors only. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. 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 strategy holdings and positioning are subject to change without notice. Newton claims compliance with the Global Investment Performance Standards (GIPS®). To receive a complete list and description of Newton composites and a presentation that adheres to GIPS standards, please contact Newton via telephone on +1 212 922 7777 or via email to info@newtonim.com. Newton Global Real Return (USD) composite contains fully discretionary portfolios which have an unconstrained multi-asset investment mandate which has an absolute return style performance aim, while seeking to preserve capital, through security selection, diversification and simple hedging strategies and for comparison purposes is measured against 1-month USD LIBOR +4% per annum.
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