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Newton’s Real Return team is leaning towards carry strategies as a way of generating a return from income, while maintaining a relatively defensive overall posture. Aron Pataki, portfolio manager on the team, which manages the BNY Mellon Global Real Return Fund, says the portfolio was heavily defensive in the final quarter of 2018 but the team did move to capture some of the upside of the January rally when markets bounced back.
Duration has been one of the areas in the portfolio that has been managed dynamically through the past year. Pataki points out that in Q2 2018 duration, on the strategy, was towards one year, rising to almost six years by the end of Q4, similar to its position back in 2008. Currently, he says, duration on the portfolio is closer to four years. “We use this duration positioning in a similar fashion to our gold holdings, as a cross-asset class hedge in the portfolio,” he explains.
Some of the duration was scaled back after the team sold down its U.S. government bond position, which accounted for a weighting of c.20% as of the end of Q4. Cash has since risen to a high single digit percentage of the portfolio, he says, largely in very short-dated euro government bonds and credit to aim to avoid capital erosion.
The gains taken from its U.S. Treasuries allocation are being deployed in other areas, including select emerging market debt opportunities. These offer a comparatively high yield, he says and demonstrates just one example of the team’s carry plays in order to boost income-producing assets in the strategy. Right now, he points out, the yield on Real Return is c.3%, which goes some way towards the Fund’s performance aim of Libor-plus-4% return over five years.
The team are also maintaining direct hedges, something that dragged slightly on returns in Q1. This small loss was more than offset by a positive contribution from the principal indirect hedge, developed market government bonds, and the allocation to risk assets in the opening quarter of 2019. Pataki says the team favors short Russell 2000 index futures, as a hedge. It is an index Real Return has used since mid-2018 and one Pataki says is a useful hedge given what he believes to be downside sensitivity of US small and mid caps. He thinks they look particularly vulnerable at the moment given high leverage and elevated valuations.
“The global economy is facing a number of structural and cyclical issues and so we think it is prudent to stay cautiously positioned and take some risks at the margin. We think volatility will remain a key factor in markets this year but there remains a lot of optimism out there,” Pataki concludes.
All investments involve risk, including the possible loss of principal. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. Investors should receive a prospectus, or a summary prospectus, if available, that contains this and other information about the fund, and should be advised to read it carefully 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.
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