The genesis of the Real Return strategy, when it was first set up in 2004 under the leadership of former Newton veteran Iain Stewart, centred on the concept of a long-term savings vehicle that should be highly flexible and exhibit asymmetry of return by balancing participation in risk-asset markets with a strong emphasis on capital preservation. Rather than relying on models to forecast market returns, insight and perspective were gained through long-term thematic research, allowing the team to make sense of a complex, interconnected world and provide ideas for security selection. Risk was defined as a permanent loss of capital rather than volatility which, although commonly used as a risk proxy, may in fact represent an opportunity.

The global financial crisis and its aftermath

Much of the first ten years of the strategy’s existence was dominated by the fallout from the 2007-8 global financial crisis, an extended cycle prolonged by repeated waves of monetary largesse and supressed volatility, and characterised by historically low interest rates.

During the run-up to the crisis, the team foresaw challenges within many major economies, namely the build-up of debt and excess leverage in the financial system, and indeed this development was encapsulated in the Newton ‘debt and credit’ theme.

The acid test for the strategy occurred in 2008 when the financial crisis unfolded in full force. The strategy was able to benefit from a combination of its direct equity protection, significant cash exposure diversified out of sterling into safe-haven currencies, and indirect hedges in the form of call options on government bonds and gold. It was during this period that the appeal of having a fully flexible strategy was appreciated by clients, while the shortcomings of pursuing an equity index-tracking strategy were keenly felt. The strategy ended 2008 in positive territory, amid carnage in equity markets.

The team quickly capitalised on attractively valued securities during the indiscriminate sell-off that ensued, and the period served as something of a blueprint for how to make full use of the wide range of tools available. Indeed, the success of the strategy gave rise to US-dollar and euro versions, launched in 2009 and 2010 respectively, in response to demand from international investors.

The strategy further evolved in 2018 with the creation of a separate sustainable version, in recognition of the priorities of a subset of clients. This version of the strategy focuses not only on seeking to deliver a long-term performance objective, but also on investing in issuers that positively manage the material impacts of their operations and products on the environment and society.

Performance and risks
 

Source: Newton, close of business prices, total return, income reinvested, in GBP, 31 March 2024.

Performance is stated gross and net of management fees. The net-of-fee returns are calculated by deducting an annual management charge of 0.75% from the strategy’s gross-of-fee returns. The impact of management fees can be material. A fee schedule providing further detail is available on request.

Performance benchmark: The strategy seeks to deliver a total return of SONIA (30-day compounded) +4%* per annum over rolling 5-year periods, from a globally diversified portfolio. In doing so, the strategy aims to achieve a positive return on a rolling 3-year basis. However, a positive return is not guaranteed and a capital loss may occur.
*Effective 31^st October 2021, The benchmark changed from the London Interbank Offerred Rate (LIBOR) to the Sterling Overnight Index Average (SONIA). All benchmark perfromance prior to this date was calculated against LIBOR.

Newton Real Return strategy – key investment risks

• Performance aim risk: The performance aim is not a guarantee, may not be achieved and a capital loss may occur. Strategies which have a higher performance aim generally take more risk to achieve this and so have a greater potential for returns to vary significantly.
• Currency risk: This strategy invests in international markets which means it is exposed to changes in currency rates which could affect the value of the strategy.
• Derivatives risk: Derivatives are highly sensitive to changes in the value of the asset from which their value is derived. A small movement in the value of the underlying asset can cause a large movement in the value of the derivative. This can increase the sizes of losses and gains, causing the value of your investment to fluctuate. When using derivatives, the strategy can lose significantly more than the amount it has invested in derivatives.
• Changes in interest rates & inflation risk: Investments in bonds/money market securities are affected by interest rates and inflation trends which may negatively affect the value of the strategy.
• Credit ratings and unrated securities risk: Bonds with a low credit rating or unrated bonds have a greater risk of default. These investments may negatively affect the value of the strategy.
• Credit risk: The issuer of a security held by the strategy may not pay income or repay capital to the strategy when due.
• Emerging markets risk: Emerging markets have additional risks due to less-developed market practices.
• Liquidity risk: The strategy may not always find another party willing to purchase an asset that the strategy wants to sell which could impact the strategy’s ability to sell the asset or to sell the asset at its current value. 

Past performance is not a guide to future performance.

The value of investments can fall. Investors may not get back the amount invested. 

Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.