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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.
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