Newton calls ‘all change’ to caution

“All Change”, the latest investment theme on Newton’s Global Balanced fund, has brought a move into “big, defensive but cheap things” as its manager prepares for years of deleveraging.

The mantra for the investment industry has always been “we make you money”. But as the financial crisis moves from one stage to the next, has the mantra become “we won’t lose you money”?

It’s what you hear when speaking to Newton. Iain Stewart, who manages the firm’s Global Balanced, Balanced and Real Return funds, is keen to stress that his job is about ­preserving your capital as much as increasing it.

“To make money, you have to put an equal weighting on not losing money,” he says. Yes, it sounds like a trite aphorism, but the figures in Global Balanced back him up.

”The way not to lose money is not to pay too much”

A look at the year-by-year bar chart for the fund’s performance reveals that in 2005 it trailed a bit behind its benchmark (the Balanced fund median in the Caps survey). It did the same again in 2006. The following year was better, with the fund exceeding its benchmark, again by a bit. In each of these years, returns on the fund were between 10% and 20%.

Then came 2008, when Stewart’s approach truly proved itself. The benchmark “balanced” fund managed to fall 19.8%, but Newton Global Balanced shed just 3.2%.
Normal service has been resumed since then, with the fund trailing or beating the benchmark by a small amount. But that heroic performance in 2008 has sealed Global Balanced’s place in the longer-term performance tables. It lies 12th of 208 funds in the global balanced sector, even if it looks pedestrian on the one-year front. (article continues below)

Stewart says that in its early days the fund’s core positions were in utilities, industrials and metals. Today they are in “big, defensive and boring but cheap things,” with financials (apart from some insurers) almost absent.

Behind the move into big and defensive is Newton’s “All Change” investment theme. The firm has long stressed the importance of themes and ideas. The strapline on company ads reads “The Power of Ideas” and Stewart, a 22-year stalwart of the firm, places themes at the heart of his fund.

The all-change theme is perhaps the next leg of Newton’s long-standing debt and credit theme. At its core is the idea that in the developed world we face years of deleveraging after the credit boom, and that its impact will be felt in a remarkably wide range of ways.

“The all-change theme is perhaps the most important in the portfolio,” says Stewart. “It has carried on from the debt and credit theme. We believe in a world of inevitable deleveraging, which acts against growth in the developed world.

“Authorities no longer have the capacity to cut rates or pump more credit into the economy. That means stability should sell at a premium. And that takes you into self-­financing global equity positions and away from leveraged stocks such as banks and real estate.”

The big and boring stocks Stewart likes include Glaxo and Vodafone (the two biggest equity positions in the fund) as well as Smith & Nephew, Roche, Novartis and Deutsche Telekom. Major underweights are HSBC, Shell and Rio Tinto.

But this is a multi-asset balanced fund, so the equity port­folio is only part of the story. It is 60% of the fund, with corporate debt making up most of the rest of the portfolio, although with little sovereign debt. But Stewart also has some hard and soft commodities. He has exposure to gold both physically through exchange traded funds and through mining shares such as Newcrest and Newmont.

But hold on. If Newton sees deleveraging as a core theme, surely that also spells deflation. And in that case, how can you also support gold, the inflation hawk’s investment of choice?

Stewart squares this circle by referring to Newton’s “fire risks” theme. “All-change is deflationary, but ’fire risks’ are about policies put in place to counter that, which are reflationary,” he says. If that sounds like having your cake and eating it, it works. Newcrest and Newmont have been two of the biggest contributors to outperformance in recent months.

Softs have come in handy too. ETFS Agriculture is in the fund’s top 10 and it, too, has performed well. Telecoms make up his biggest sector position, at nearly 18%. “Telecoms are a good way to play the developing world, and I like them in the developed world as well,” he says. “The mobile internet also has phenomenal potential.”

But there is a discernible caution in Stewart’s portfolio at present, and not just about the developed world. His emerging market positions have been pegged back, with Stewart talking of a “euphoric” attitude among other investors compared with his own more “circumspect” view of the asset class.

“The way not to lose money is not to pay too much,” he says, not specifically referring to emerging markets but maybe pointing that way.
Stewart wants to offer investors an equity-style return over the longer term, but from a lower-risk, lower volatility portfolio of equities and bonds. So he’ll have emerging market growth, but will never be gung-ho in the sector.

It’s a global fund, but one run from a sterling perspective and with an understanding of currency concerns.

“The challenge in running a global fund is getting the currency right,” says Stewart. “We were concerned about sterling in 2007/08, and held as little as 35% and lots of cash. We hedged out our sterling risk. Then, after the devaluation, we moved back 75-80% into sterling, although now it’s down to 66-67%.”

Stewart doesn’t baulk at big top-down decisions as well as bottom-up stockpicking. The fund may be a mix of bonds and equities, but he’s adamant that it’s not just a jigsaw fund of other bits of Newton. “This is not a fund of funds. I’m responsible for all sectors and every asset class,” he says.

Inflows into Stewart’s funds have been terrific over the past year, at about £1 billion. Stewart’s long record and ability to produce growth alongside a superb record in preserving capital has given him a strong following. He is one of the quieter stars of the investment industry.