Stewart (pictured), who runs the £7.9bn Newton Real Return fund, says protecting capital is becoming an increasingly difficult task, as stimulus measures are massively distorting prices in both global equity and fixed income markets. The manager says that all quantitative easing is doing is pushing markets towards another financial crisis.
"It is our key concern not to lose money for our investors; the objective really is capital preservation," said Stewart, who began running multi-asset portfolios in 1992.
"Fixing the price of government bonds is a very risky policy as it can lead to mis-allocated capital."
"I would say now is the most dangerous environment I have ever seen. It feels nice when stock prices just keep going up, but if anything, those assets are being pushed up by policy."
"It may be an uncomfortable thought, but we need to keep reminding ourselves that the reason we are all bathing in an ocean of liquidity some five years on from the financial crisis is that we have, to date, failed to lay to rest the legacies of the last cycle."
"The problem is that forcing mature, ageing economies to grow through monetary easing is recreating the distortions and excesses which caused the crisis in the first place."
"There is also a risk that the policy of continuous monetary accommodation may itself be becoming part of the problem."
"Low-to-zero interest rates do seem to sap the vitality of economies while at the same time inflating expectations and valuations of financial assets."
"The growing disconnect between expectations and reality could ultimately set the scene for the next crisis."
"Although the trajectory of risk-asset markets may well continue upward for now, there is a high probability that further problems will emerge," he added.
Stewart has been running Newton Real Return since the fund’s launch in March 2004.
According to FE Analytics, it has returned 66.15 per cent over this time while its benchmark – the Libor GDP 1m index – has returned 30.8 per cent.
Performance of fund vs index since Feb 2004
Source: FE Analytics
The fund has an annualised volatility of 8.55 per cent over the period, which is considerably lower than that of the FTSE All Share.
Newton Real Return has made positive returns in all but one calendar year since its launch almost a decade ago.
The fund managed to make money in the crash year of 2008, but lost 3.93 per cent in 2011. Stewart attributes those losses to a lack of exposure to the gilt market.
He says the big problem lies in the lack of any value in fixed interest, which is pushing even low-risk investors into equities.
The manager aims to keep risk as low as possible by holding high-quality large caps. However, he acknowledges that there will always be volatility when investing in equities.
"We look at traditional assets in traditional ways. How I see this fund is as a long-term savings plan; especially in a world of a lot of volatility, protecting capital is a very important part of generating returns," he said.
"In the past when markets were healthier, you could basically use passive investing and hop on the returns, but now it is different."
"We hold around 60 per cent in equities at the moment, with a heavy bias towards non-cyclical areas such as healthcare, tobacco and utilities. We hold around 10 to 11 per cent in corporate debt, but it is at the higher-risk end as it is sub-investment grade."
"I think people are broadly right when they say there is no value in bonds."
"You are getting very low levels of yield from government bonds. Though they can be quite useful from a risk-management point of view, central bank intervention has made them more risky."
"If you have a 10-year government bond with 7 per cent duration, if interest rates were to move by 1 per cent, investors would lose a lot."
"If yields were to increase then it would be a dangerous environment. That won’t happen yet as there is too much debt; however, the risk is out there."
Stewart says that he only has exposure to two areas of the sovereign debt market – Australia and Norway.
He holds Australian government bonds due to the elevated level of yield and Norwegian sovereigns because they are a "genuine safe-haven asset".
Although Stewart is by no means a supporter of the liquidity measures, he says investors must prepare for an extended period of central bank intervention.
"I guess the popular view is that quantitative easing seems to be working in the US, with some saying they may make fewer asset purchases and then we would see a normalisation in interest rates in the near future – I don’t believe that," he said.
"I think the numbers in the US are quite soft. I think the central banks are absolutely desperate to keep interest rates low for a very long time in order to pay off the huge amounts of debt in the system and I also think they will keep interest rates below inflation."