Newton’s solid defence pays off

Newton Investment Management has worked a transformation in its performance over one year, thanks to a defensive strategy that paid off in the second half of 2007. Adam Lewis reports.

In the year since Fund Strategy last profiled Newton (January 29) the fund management group has enjoyed a significant improvement in its funds’ performance.

Over 12 months to January 22, 2007, only nine out of 25 funds with a one-year track record were ranked either first or second quartile in their peer groups, according to Morningstar. However, over one year to January 7, 2008, the number ranked at those levels has jumped to 19 out of 27 funds.

This improvement has also spilled over to the group’s three-year figures. Last year only half (10 out of 20) of the funds with three-year track records were in the top of their sectors. Now 15 out of 23 funds, almost two-thirds, are in that position.

According to Darius McDermott, managing director of Chelsea Financial Services, much of this improvement is the result of the group’s defensive fund positioning.

He says: “Newton are thematic investors. They were thematic before thematic investing became fashionable in the early 2000s. However, whereas other managers abandoned the concept, Newton has stuck with it, always with an eye on valuation. The theme it has followed over the past couple of years has been to be defensive and this worked well in the second half of last year.”

Helena Morrissey, chief executive of Newton, confirms this argument. “For some time we have been worried about the indebtedness of consumers in the developed markets,” she says. “As such we have been overweight in the Asian and developing economies, and this played out well last year. We did underperform in the fourth quarter of 2006, when UK banks had a run, but we are long-term investors.”

All Newton’s funds are run according to the group’s global thematic investment process, which draws on the ideas of its global analyst team. The analysts work from a global house view that looks at the world first on an industry basis and then by geographic regions, depending on a fund’s individual mandate.

Morrissey says: “We are not interested in our funds trying to get short-term wins. Instead our global approach means that funds in different sectors and different regions have all benefited, meaning good performance was across the board.”

She adds that Newton does not view the credit problems affecting financial institutions as a “one-minute wonder” and that it will take time for them to work through the system. For this reason the group is not changing any themes at this stage. “Last year was a nice validation of our long-term perspective and our fundamental analysis,” she says.

One of the most dramatic improvements in performance of individual funds was on the £1.1 billion Income fund. Last year the fund was ranked fourth quartile in the IMA UK All Companies sector over both one and three years. Now, 12 months on, and under the guidance of a new manager, it is ranked first quartile over both periods and was the best performing of all funds for the 2007 calendar year.

Christopher Metcalfe became manager of the Income fund in April. Metcalfe, who joined Newton in mid-2006 from Schroders, replaced Nick Clay and Rob Marshall-Lee, who had co-managed the portfolio. At the time the rationale for the change was to reflect the fact that the self-styled core UK equity fund had moved to more of an institutional approach.

Morrissey says: “Chris has done a great job in carrying on the management of the fund. In the past the fund has suffered in performance terms because, like all our other funds, it was overly defensive. However, we are now reaping the fruits of this stance.

“In fact, Chris did well not to change things when he first took over. It shows how well he has fit into the team and it shows his experience in that he wasn’t being tempted to try and put his own stamp on the fund.

“Overall the turnaround on this fund is a good example of Newton sticking to its principles and not getting too anxious about [poor] short-term performance.”

Chelsea’s McDermott, who met Metcalfe in September, says: “He is a good manager and the fund is on our watch list in the core UK equity area.”

At Schroders Metcalfe ran the group’s UK Equity fund, which follows a similar core approach, meaning portfolios are constrained in where they can invest at both a stock and sector level.

However, it was not only the Income fund that saw a change in performance last year. The American fund is now ranked first quartile over one and three years, whereas last year it was third and second quartile respectively.

The group’s European funds have also ticked up markedly in performance, as have its range of absolute and multi-asset invested funds.

Indeed, all Newton’s absolute return mandates were ranked first quartile for 2007, as were all its multi-asset funds, unconstrained funds, global equity funds and UK All Companies funds.

Bambos Hambi, head of multi-manager at Gartmore, has noted the performance turnaround, although he holds no Newton funds at present. He says: “All of the UK equity funds seem to be doing well, as [are Newton’s] American and European funds, so they must be doing something right. It seems that after going off for a couple of years, their thematic business model is back on track.”

However, one portfolio that has not felt the full benefit of Newton’s global thematic approach is the Japan fund. While other funds have risen to first quartile in the rankings, Japan remains third quartile over one year and fourth over three years.

Morrissey explains: “Our approach using global comparisons led us to prefer companies in the best-performing sectors away from Japan, which wasn’t helpful to the regional strategy. This is one of the lessons learnt last year and we need to learn how to avoid doing it again in the future.”

One of the main themes to emerge from Fund Strategy’s profile on Newton a year ago was that it had stabilised its team, losing fewer fund managers to rival groups; 2007 proved to be another stable year. The only significant departure took place at the end of the year, when Aaron Barnfather, manager of the recently launched European Higher Income fund and the Pan European fund, left the group.

Barnfather’s destination has yet to be announced, but the replacements on his funds have been appointed. Raj Shant, manager of the Continental European fund, has assumed control of European Higher Income while Tom Beevers is now lead manager on the Pan European fund.

Beevers joined Newton in 2004 as an assistant investment manager working on the European team. The Pan European fund is his first retail fund, while he is now the alternate manager on the Continental European fund.

Despite the loss of Barnfather, Hambi is confident that such departures are now “the exception rather than the rule” for Newton. This is largely because at the end of 2004 the group set up a phantom equity scheme to lock in managers.

Morrissey says that Newton will not add funds to its range just for the sake of it. One range it will add to, however, is equity income. The group already runs UK, European, Asian and Global equity income mandates and Morrissey says that “this suite maybe broadened into new areas going forward”.

The group also recently launched the Newton Diversified Growth fund, which Morrissey says completes its range of target return funds. The target return range at present consists of the Newton Phoenix Multi-Asset and Newton Absolute Intrepid funds.

“The Diversified Growth fund is similar to the Phoenix fund, just without the fixed income element,” Morrissey adds.

McDermott is an admirer of the existing fund, which like Diversified Growth, is managed by Phil Collins. “The fund now has a three-year track record, and while we don’t have multi-funds on our buy panel, it is one we will market to our clients this year,” he says.

At the end of our last profile on Newton, Morrissey concluded that after appearing to stabilise the team, the priority was to restore performance on several funds. Her priority now is to sustain this.

“There is never an end point in fund management,” Morrissey says.


NEWTON INVESTMENT MANAGEMENT is a London-based global asset management subsidiary of the Bank of New York Mellon Corporation and part of BNY Mellon Asset Management. Newton, with assets under management of nearly £38 billion, provides a range of investment products and services to individuals, pension funds, charities and companies.

The best and worst funds for each group profiled in the Focus are now shown on a relative rather than absolute basis. Previously, the best and worst funds have been defined in absolute terms. But the percentile ranking of a group’s funds are now shown relative to their respective sectors.>strong