Newton's approach to global bond investing
Newton Capital Management
September 2011
We are active managers with a long track record of investing in global sovereign bonds and currencies
We believe that an active, global, flexible approach to sovereign bond investing should be advantageous in helping us to achieve our clients' investment objectives. At Newton, we do not follow an index-led investment approach to fixed income. This is because the composition of bond indices is determined by the market 'capitalisation' of sovereign issuers, with a greater debt burden increasing the weighting of an issuing government in an index. However, if increased issuance is attributable to a higher level of government borrowing (as a percentage of GDP), it is likely to be associated with that government's declining credit quality. A good example of this has been Japan, whose weighting in bond indices has risen over the last 15 years, but whose bond market has been one of the worst performing in the sovereign universe.* By taking active country, duration and currency decisions, in the context of a global thematic approach, we believe that investors should be well-equipped to avoid this scenario.
We believe our global thematic approach is ideally suited to fixed-income investing
Our global investment themes are long-term in nature and the forces they identify tend to have a significant effect on interest rates and currencies. Using themes distinguishes us from other managers, who may be caught up in the short-term 'noise' of markets. Recent examples include our global realignment and deleverage themes, which have led us to favour currencies other than the euro, the yen and the US dollar. We prefer currencies such as the Norwegian krone, the Swedish krona and particular Asian currencies that are not held back by over-indebtedness and that have good support from local economic growth.
We are benchmark-aware, but we do not strive to mimic benchmark compositions in our portfolios
There are periods when duration flexibility can be extremely important. Sticking close to the duration of an index during times of rapidly rising or falling interest rates can lead to capital losses or missed opportunities. At Newton, we strive to achieve our clients' objectives through active management of many factors, such as duration, credit-quality exposure, stock selection and currency exposure. We use indices to identify the universe of investment candidates, but we believe it is the ability to deviate thoughtfully from the composition of those indices (within acceptable levels of risk) that creates significant investment opportunities from a global portfolio of securities.
We adjust portfolio duration according to the interest-rate cycle. Over the last few years, duration has been as low as four years and as high as eight years (against index duration of about six years). This has helped to protect portfolios from significant capital loss during periods of rising bond yields, and has been positive for returns during periods in which growth has been weak and markets have witnessed 'flights to quality'. Our country allocation can also be described as 'active', as it does not mimic index weights, and we have the flexibility to invest in fixed income securities across the globe. We do not own securities in a bond market that we expect to weaken (even if that market has a large weighting in the index).
We manage bond and currency risk separately, but each draws upon the same process
The economic circumstances that support a bond market may undermine its related currency. Weak economic growth and declining interest rates are generally good for domestic bond markets but bad for currencies. Investing in a bond market, while hedging related currency exposure (into another currency that has better support), is a strategy that we use extensively in our global bond portfolios. Our global themes are vital in guiding our respective decisions about bond and currency exposure.
Our flagship global bond portfolios do not hold corporate bonds; they hold only sovereign bonds and the issues of sovereign-supported entities
Our global bond strategy is focused upon sovereign bonds. We may hold quasi-government bonds, such as supra-nationals and agency debt, but we do not have any material exposure to corporate bonds. We manage duration, country and currency allocations actively, as part of our aim to meet our clients' investment objectives.
* Source: Bloomberg
Important information
This is a financial promotion and is not intended as investment advice. The opinions expressed in this presentation are those of Newton and should not be construed as investment advice. Past performance is not a guide to future returns. The value of your investments and the income from them can fall as well as rise, and investors may not get back the original amount invested. The value of overseas securities will be influenced by fluctuations in exchange rates. If part of the portfolio is invested in sub-investment-grade bonds, which typically have a low credit rating and carry a high degree of default risk, then please be aware that this may affect the capital value of your investment. If the portfolio has exposure to gold, private equity or property via publicly traded securities, there are additional risks associated with these sectors. The information contained within this document should not be construed as a recommendation to buy or sell a security. It should not be assumed that a security is, or will be, profitable. There is no guarantee that a security will remain in a portfolio, and portfolio holdings are subject to change at any time.
'Newton' refers to the following group of affiliated companies: Newton Investment Management Limited, Newton Capital Management Limited, Newton Capital Management LLC, Newton International Investment Management Limited and Newton Fund Managers (C.I.) Limited. NCM LLC personnel are supervised persons of NCM Ltd and NCM LLC does not provide investment advice, all of which is conducted by NCM Ltd. Except for Newton Capital Management LLC and Newton Capital Management Limited, none of the other Newton companies off er services in the U.S.
In the U.S. this document is issued by Newton Capital Management Limited. Newton Capital Management Limited is an investment management firm authorized and regulated in the United Kingdom by the Financial Services Authority in the conduct of investment business and is wholly owned subsidiary of the Bank of New York Mellon Corporation. Registered in England no: 2675952. Newton Capital Management Limited is registered in the United States as an investment adviser under the Investment Advisers Act of 1940. Newton Capital Management LLC provides marketing services in the U.S. for Newton Capital management Limited. Tel: (212) 922 7331. www.newtoncapitalmanagement.com
In the UK, this document is issued by Newton Investment Management Limited, the Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No.13719773. Newton Investment Management is authorised and regulated by the Financial Services Authority. www.newton.co.uk
In Jersey, this document is issued by Newton International Investment Management Limited and Newton Fund Managers (C.I.) Limited both of Liberte House, 19-23 La Motte Street, St Helier, Jersey, C.I. JE2 4SY. Both companies are regulated by the Jersey Financial Services Commission.
