PORTFOLIO INSIGHT


from that security, in terms of what else you own in the portfolio, the liquidity of it and what it brings to the portfolio’s overall construction.


With heightening concerns over market liquidity, how would the strategy cope ‘when the music stops’? We have deliberately created a portfolio where we want to be invested in securities that have daily liquidity, are valued daily and exchange-traded.


In essence, everything is liquid. We are not


ronment where people are not frightened to express their views.


Because it is a multi-asset strategy one per- son cannot be an expert at everything. Each team member has their area of expertise – it could be equities, bonds or derivatives. The lead managers – Aron Pataki, Andy Warwick and I – are ultimately responsible for the overall capital allocation of the portfolio. Some of us are more focused on the shorter term and technical aspects, and others on the broader, bigger picture. Some have


We own gold because we are living in


a topsy-turvy world of quantitative easing, and no one really understands what the consequences of that policy will be.


going into private equity holdings or assets that cannot be independently priced on an exchange. Of course, depending on market cap and the type of investment, some secu- rities will inevitably be more liquid than others, but even the strategy’s alternative investments such as renewables and infra- structure are held via listed investment trust vehicles, which provide access to these assets in a transparent and tradeable manner.


As leader of the Real Return team, how do you ensure that you maintain the right mix of capabilities and talent?


The behavioural side of the investment approach is a major consideration in our investment decision making and should not be underestimated. First, there are nine of us in the Real Return team, so it is a broad, deeply resourced team. On top of that we have the experience of around 60 other investors at Newton who contribute to the process. The Real Return team come from different walks of life, different age groups, genders and experience. It is important as the team leader to maintain balance but also to cre- ate challenge and debate in an open envi-


cups that are half full, while others have cups that are more half empty. We hired Andy Warwick from BlackRock about 18 months ago. His different perspec- tive is important because you constantly need to challenge your own views, chal- lenge your approach, see if there is any- thing better out there and learn from others.


What role does gold play in the portfolio? Gold has been a part of the portfolio since the financial crisis. We access it through mining equities and physically by owning an exchange-traded commodity (ETC) fund. We own gold because we are living in a top- sy-turvy world of quantitative easing, and no one really understands what the conse- quences of that policy will be.


What we do know is that paper money can be manipulated through printing and does not have a ‘real’ value, unlike gold which has a finite supply. Gold can also be a good inflation hedge and also be useful when real rates are in decline. It can also perform differently to other assets in the portfolio, providing a good hedge in challenging market conditions.


Issue 86 | September 2019 | portfolio institutional | 45


Is it possible to manage such a strategy with an ESG or sustainable tilt? I know ESG is fashionable, but Newton has always integrated environmental, social and governance considerations in its port- folios, including the Real Return strategy. We do not screen out stocks; rather, ESG is part of our risk-management process when making investment decisions. We have a group of ESG analysts who work alongside our industry analysts to rank securities in terms of where we see them sitting on the ESG spectrum. You can quantify ESG as a risk factor. Take the example of a major oil spill: if a company does not make the capital expend- iture, if it does not have the systems and safety procedures in place, it might improve the margins for a period of time, but ulti- mately there will be a liability cost. When you are thinking about making an investment it is important to understand the ESG aspects along with all the other angles to an investment case. Sustainability is taking ESG one step fur- ther. We launched the Sustainable Real Return strategy in April last year; it is run by the same team and has the same philos- ophy and approach as the Real Return strategy.


There are some hard rules. It does not invest in tobacco, for example, and any investments must be compatible with meeting CO2 emission targets and fit within the UN Global Compact’s 10 principles.


The strategy tends to focus on the more sustainable parts of the economy, such as infrastructure and renewables. There is about 80% commonality of hold- ings with the Real Return strategy and it has the same objective to achieve a return of LIBOR +4% on a rolling five-year basis.


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