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How to build a real return portfolio
Suzanne Hutchins, leader of Newton Investment Management’s Real Return team, discusses her attitude to risk, the importance of ESG, and why she is not happy unless the team challenges her views.
How is Newton’s Real Return strategy rele- vant for pension schemes?
The strategy is a good way to diversify sources of return. There is also a capital- preservation balance to the objective, which in elevated markets provides the potential to access return in a lower-risk way to avoid large drawdowns.
The strategy is multi-asset and multi-faceted, and draws upon a broad opportunity set. We are not subject to a
With the strategy being unconstrained, how is risk managed? We embed risk throughout our entire investment process. A lot of managers think about risk in terms of volatility, whereas we assess the probability of per- manent loss of capital from each individual investment. So the starting point of the process when thinking about risk is defining what the objective is. This is a portfolio that is trying
A lot of managers think about risk in
terms of volatility, whereas we assess the probability of permanent loss of capital from each individual investment.
benchmark where we are forced to invest in certain areas of the market. It is a ‘go-any- where’ portfolio, which means we can focus on our analysts’ opportunity ideas and a theme-based approach, as well as avoiding areas of the market that we do not like. We are aiming to deliver a return of LIBOR + 4% on a rolling five-year basis, and to pre- serve capital with low volatility. This is not a return stream you can just buy off the shelf because the benchmark is un-investable, which creates its own challenges. The toolkit is broad; it’s not just equities and bonds. There are alternative strategies, such as aircraft leasing, infrastructure, renewables, liquid real-estate exposure, gold and derivatives for example, which can help to protect capital, and which clients might not otherwise be able to access. There is also a rapid implementation to the strategy at times. The dynamism makes it versatile. It is not something that can be easily mirrored by an ETF.
to generate a return and to preserve capital over a cycle, so we are talking about a long period. It will fluctuate from week to week or month to month.
Then you have the opportunity set. There is a lot of rigour and discipline, with each security recommended by our analysts. Knowing what you own and why you own it is pertinent to understanding the risks being taken. You need to research a security’s business model, cash-flows, balance sheet, how the business will perform in particular
environments, and
what the downside and upside potential is. Putting that together in a portfolio that has a stabilising layer around the core could then take out some of the risk.
If, for example, you have a lot of 44 | portfolio institutional | September 2019 | issue 86
equities in the portfolio and want to take out some of the market risk, you can use short futures or option strategies. If you have a fair amount of duration in the port- folio through government bonds, and want to hedge for some potential outcomes, such as a change in central-bank policy, the stabi- lising layer can reduce risk through buying put options on a bond future.
The way we construct portfolios, with core and stabilising layers, is built around New- ton’s opportunity ideas and what the big structural trends are. Many of the growth opportunities remain in technology, the cloud, demography (demand for savings for retirement and health-care provision and population growth in China and India).
Environmental, social and governance (ESG) issues and the whole sustainability angle is a force to be reckoned with and is going to drive trends and growth in certain areas of the market. You need to understand the risks and opportunities, and avoid the areas that you do not want to invest in, and then size each position in terms of the risk contribution
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