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Newton Managed takes a “fund of funds” approach, which means that it invests in other funds managed by Newton, and makes asset allocation decisions among those funds rather than selecting individual stocks.
At the helm is Tim Wilson, Newton Investment Management’s head of strategy and asset allocation, who formulates Newton’s economic and strategic view across global sectors, markets and asset classes. As a former stock analyst and fund manager he has a unique blend of macro and stock specific experience. Tim collaborates with the five managers who run the underlying funds in which Newton Managed Fund (which for clarity we’ll refer to as “the Fund”) invests, including Bhavin Shah, lead manager of BNY Mellon Multi-Asset Growth, the largest position in the Fund.
Mr Wilson and Mr Shah kindly granted an interview to the FundsTalk team to talk about how the Fund works, what their investment approach is, and why the Fund’s asset allocation has changed for only the second time in ten years.
“OUR APPROACH MEANS EACH FUND CAN CONTRIBUTE MEANINGFULLY WITHIN THE LARGER FUND. IT’S THE DISTILLATION OF WHAT NEWTON IS ALL ABOUT.”
Thank you for speaking with us today. To start off, can you tell our advisers a bit about the history of the Newton Managed Fund?
Tim Wilson (TW): We launched the Fund with Scottish Widows 20 years ago, as of the 9th September. To meet the investment aims mandated by Scottish Widows, we opted for a fund-of-funds structure. For the first 10 years, we invested in three underlying funds: Newton Multi-Asset Growth, Newton UK Opportunities, and Newton UK Long Gilt Fund. Then we expanded this to include our Global Dynamic Bond Fund, which gave us the flexibility to invest in different types of bonds, and Global Equity Fund, to increase our exposure to the risk-on equity environment which has benefitted performance over the past 10 years. At the time (2008), we were at the height of the global financial crisis, and the addition of these funds allowed us greater flexibility.
This year, we have opted to take some risk off the table given the macro environment. This applies to the asset allocation among the five funds, as well as the holdings within those funds.
Let’s walk through your investment process. How is the house strategy that you set embedded in the underlying funds? How do you maintain a consistent investment process across different types of funds?
TW: The process starts with our macro outlook on the economy and inflation, as well as the prospects for corporate profits, to determine whether the environment is more likely to be supportive of equities or bonds. Based on our high-level outlook, we then decide the asset allocation split, equity positions by region and sector, and what types of bonds are attractive. A large part of the rationale for security selection is left to the manager of the underlying funds, driven by this macro viewpoint.
Bhavin Shah (BS): Within the equity components, for example, there is a “home country bias”. To some extent, this is mandated by Scottish Widows, but we are comfortable with it because a large number of UK companies derive their earnings overseas (thus benefiting from weaker sterling). There’s a higher certainty of income with UK holdings, plus attractive opportunities within a small portfolio of growth stocks. Within the Multi-Asset Growth Fund, we have the flexibility to create a portfolio that is both diversified and targeted to growth opportunities.
Newton is well known as a thematic investor. Can you give us some examples of your strongest investment themes this year?
BS: Yes, that is true. We have a global mindset and are governed by our investment themes. As a result, sectorial biases tend to be more important to us than regional ones, because our themes lead us to be concentrated within a few industries. For example, the “Healthy Demand” theme favours securities that can benefit from the call for healthcare services and other goods and services related to an aging population. With the “Smart Revolution” theme, we look for companies that are enabling technological innovation and increased connectivity, the rise of AI and machine learning, electric cars, and so forth. Another key characteristic that we look for in companies is stable and consistent cashflows that can lead to attractive dividend yields. We believe that these types of companies will continue to have valuation support as investors continue to hunt for income (Diageo and Relx are two good examples of this among the Fund’s Top 10 Holdings), especially as bond yields remain low globally.
You mentioned earlier taking some of the investment risk off the table in 2019. What asset allocation changes have you made this year, and what’s the reasoning behind them?
TW: Significant asset allocation changes within the fund are relatively rare – we’ve only made two major changes in the past 10 years! The most recent change was at the start of this year, with equity exposure being reduced and fixed interest exposure increased by adding to Global Dynamic Bond. This was mirrored by a reduction in risk in the underlying funds as well. Within the equity component, we reduced the UK allocation in favour of more overseas exposure.
We believe the current position offers good diversification, with a mix of income and growth. We’ve not added more funds, because our experience has been that five is the ideal number at this time: it is easy to keep track of each position, the team can communicate and collaborate effectively, and we can more accurately monitor the aggregated risk of the Fund.
BS: Our approach means each fund can contribute meaningfully within the larger Fund. It’s the distillation of what Newton is all about.
“WITHIN THIS FUND, WE TRY TO KEEP THINGS SIMPLE AND USE COMMON SENSE: WHERE ARE THE OPPORTUNITIES? WHERE ARE THE RISKS? WE DECIDE WHERE WE WANT TO BE POSITIONED IN 3-TO-5 YEARS, THEN GET AHEAD OF IT.”
Finally, anything you’d like to share with our advisers about how the Fund is positioned looking ahead?
We recognise the potential risks of an impending recession and rising inflation. On this basis, the Fund’s more defensive positioning is justified. If the world becomes more equity-friendly (for example, if Brexit is resolved and the US/China trade war cools) there may be an argument to increase the equity weighting. Ultimately, within this Fund, we try to keep things simple and use common sense: Where are the opportunities? Where are the risks? We decide where we want to be positioned in 3-to-5 years, then get ahead of it.