Navigating the unpredictable

  • Tweet
  • Share on LinkedIn
  • Share via email
  • Print
  • Download

July 13, 2020
 

Following the heightened volatility and uncertainty seen in the first half of the year, Newton’s Global Real Return team has been busy preparing the portfolio for the second half, strengthening its return-seeking core, albeit hedged as they remain cautious on H2 prospects.

Newton’s Real Return team has bolstered its exposure to risk assets1 as increased central bank stimulus and oversold market conditions provided it with greater opportunity. At the same time, the team is hedging the increased risk positions with higher weightings to gold and US government debt.

Since the start of the pandemic, the world’s four largest central banks—the Federal Reserve, the European Central Bank, the Bank of Japan and the Peoples Bank of China—have introduced a variety of emergency policies, growing their combined balance sheet to roughly $23.3 trillion2. With an unprecedented level of government support against the backdrop of one of the worst market sell-offs in history, the team was able to sharpen its focus.

“From a top-down perspective, risk assets looked oversold at the end of March, particularly in light of the dramatic change in the liquidity backdrop, which had become extremely supportive owing to the extraordinary scale of central bank monetary intervention,” the team say. “At a security level, cyclical businesses were typically hit hardest in the sell-off. However, we were encouraged by signs Asian economies that went through the crisis first, were recovering relatively rapidly, so we capitalized on several opportunities.”

As a result, throughout the past quarter the team increased equity exposure in the strategy from 32.54% to 38.72%. They also singled out a re-established position in a South African multinational mining company, which they sold the prior quarter, and an increased position in a global insurer, from 0.99% to 1.10%, as decisions that have been additive to performance.

On the structural growth side, the team added a customer relationship software company, which they say showed resilience through its rebound amid the chaos. As government lockdowns accelerated the work-from-home trend, the nature of its business model may have helped its market position, according to the managers.

According to the Real Return managers, two technology giants, which may have also experienced tailwinds3, helped the fund’s performance throughout the quarter. “On a bottom-up basis, many securities that were on our ‘wish lists’, or indeed already owned, offered more attractive expected returns in the wake of a relatively indiscriminate correction.”

Hedging for the future

While the team did increase exposure to risk assets, they remain wary of further potential market disruption. The Newton managers continue to emphasize the importance of maintaining exposure to stabilizing assets at a time when the second half of the year could see a resurgence of volatility.

“In terms of the virus, second waves remain a clear threat, although in the immediate future the phasing of re-opening is critical. The longer this takes, the greater will be the incidence of second-order economic effects, such as corporate bankruptcies and large-scale layoffs, particularly once government support schemes fall away.

“As a result, our greater commitment to risk assets is hedged with increased exposure to gold and US Treasuries.”

Despite the price of gold suffering from forced liquidations during the sell-off in February and early March, the team increased its position in the metal from 15.56% on March 31 to 17.78% by May 31, before trimming the position in June following strong performance.

Exposure to US Treasuries has risen to 23.6% with the purchase of 10-year and 30-year futures to balance out the portfolio’s increased commitment to risk. While the past few months have shown just how quickly the market and economic backdrop can change, the team plans to maintain a cautious approach and prioritize flexibility in the year ahead.

“Our asset allocation remains dynamic in nature, and as we have shown over time, we are prepared to materially adjust this as the evolving outlook necessitates.”

1 Any asset that is not risk free. The term generally refers to assets with a significant degree of price volatility like equities, commodities, high-yield bonds, real estate and currencies.

2 Axios: Central banks worry their $25 trillion coronavirus stimulus isn't enough. June 10, 2020.

3 FinancialTimes: Prospering during the pandemic, top 100 companies. June 19, 2020.

 

Risks:

Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. Download a prospectus, or summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing.

All investments involve risk, including the possible loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.

Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees.

Small and midsized company stocks tend to be more volatile and less liquid than larger company stocks as these companies are less established and have more volatile earnings histories. Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries.

Short sales involve selling a security the portfolio does not own in anticipation that the security's price will decline. Short sales may involve risk and leverage, and expose the portfolio to the risk that it will be required to buy the security sold short at a time when the security has appreciated in value, thus resulting in a loss.

The use of derivatives involves risks different from, or possibly greater than, the risks associated with investing directly in the underlying assets. Derivatives can be highly volatile, illiquid, and difficult to value and there is the risk that changes in the value of a derivative held by the portfolio will not correlate with the underlying instruments or the portfolio's other investments.

Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others. To the extent the fund may overweight its investments in certain countries, companies, industries or market sectors, such positions will increase the fund's exposure to risk of loss from adverse developments affecting those countries, companies, industries or sectors.

Newton” and/or the “Newton Investment Management” brand refers to Newton Investment Management Limited. Newton is incorporated in the United Kingdom and is authorized and regulated by the Financial Conduct Authority in the conduct of investment business. Newton is registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser. Newton is a subsidiary of The Bank of New York Mellon Corporation.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries generally.

Views expressed are those of the manager stated and do not reflect views of other managers or the firm overall.

Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product as it does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific investor.

Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Investors should consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Newton and BNY Mellon Securities Corporation are subsidiaries of BNY Mellon. ©2020 BNY Mellon Securities Corporation, distributor, 240 Greenwich St., New York, NY 10286.

MARK-128040-2020-07-08