Absolute Return: The adventurous choice
Investors who are comfortable with a fund manager who uses derivatives to hedge against down-side risk may want to consider Newton Real Return.
By Mark Smith, Reporter, FE Trustnet
Friday May 18, 2012
With roughly half the portfolio in equities, the £5.5bn Newton Real Return
fund is an Absolute Return product aimed at more adventurous investors.
Unlike market-neutral strategies
such as FE Alpha Manager Reza Vishkai’s Insight Absolute Insight
fund, Newton Real Return's high equity exposure means it is much more correlated to the fortunes of the FTSE.
Our data shows that the fund has been one of the best-selling so far in 2012
FE Alpha Manager Iain Stewart, who heads up the fund, aims to achieve significant real rates of return through investment in a diversified portfolio of UK and international instruments.
In terms of performance, the fund has been consistent in achieving this aim. Data from FE Analytics
shows that it has comfortably beaten inflation over three and five years, returning 20.26 per cent and 34.04 per cent over each respective period. By comparison the consumer price index has returned 10.39 per cent over three years and 16.6 per cent over five.
Performance of fund vs sector and index over 5-yrs
Source: FE Analytics
However, the fund’s correlation to the equity market means that it has had a tough year, losing 3.55 per cent over the past 12 months.
"It’s been a difficult year for most investors and us included," said Stewart. "We have managed to protect capital but most asset prices have fallen and those assets which are seen as risk-free do not offer a real return, which clearly makes them inappropriate for this strategy."
The fund’s exposure to the equity market means that it has been more volatile than the average Absolute Return fund over the medium-term, with an annualised score of 9.42 per cent over the last five years. However, it has been significantly less volatile than the FTSE All Share index, which has a score of 17.29 per cent.
Tim Cockerill, head of collectives research at Rowan Dartington, says that one of the qualities of the fund is Stewart’s risk-reduction approach.
"This is a very different animal to the market-neutral strategies in the sector," he commented. "It started life as an equity and bond fund and has evolved to become more sophisticated over time."
"The fund captures a reasonable amount of the upside and makes use of currency, contracts for difference (CFDs), and derivatives to dampen volatility in down times. Performance has been very credible and it is a fund that I use."
Stewart commented: "Currently the assets in the core of this strategy comprise high-quality equities with good dividend yields and the prospect for dividend growth."
"There’s also some corporate debt that is high up the capital structure and that has pretty reasonable yields. Outside of that we have a risk-absorbing layer, rather like a car tyre, which comprises a whole range of other assets that can reduce volatility, protect capital and hedge various outcomes."
"We have a very significant slug of cash and are focused on a defensive currency mix with emphasis on the US dollar. We also have some government bonds that don’t provide a real return but that can move in the opposite direction to equity markets."
Stewart remains defensively positioned despite optimism in the global recovery.
The fund has a minimum investment of £20,000 and a TER of 1.11 per cent.