With 2022 already kicking off in a more volatile fashion, Newton Investment Management veteran Suzanne Hutchins (pictured) is glad to be at the helm of a ‘go-anywhere’ portfolio. BNY Mellon’s real return outfit is one of the few multibillion-pound franchises left in the beleaguered absolute return sector.
The nine-strong team, led by Hutchins, manages around £14bn ($19bn) worth of global assets. Her UK-domiciled BNY Mellon Real Return fund, which stands at £5.8bn, is now bigger than former giants Invesco Global Targeted Returns and ASI Global Absolute Return Strategies, which have been hit by an exodus of cash in recent years.
Better relative performance has surely contributed to the fund’s staying power. Hutchins and co-managers Aron Pataki and Andy Warwick have returned 20.9% over three years, according to Trustnet, over double the IA Targeted Absolute Return (TAR) sector average of 9.5%.
But as markets have become choppier, thanks to mixed economic data and inflation jitters, the fund has lost some ground, falling by 3.8% during the past three months, while the average absolute return fund has mustered 0.1%.
Health and safety
Navigating falling markets and unexpected liquidity events such as the Covid crisis is not for the faint of heart, which is why Hutchins says it is crucial for fund managers to be “healthy in mind and body” and to “keep things simple”.
“I think you need to have an intellectual honesty about yourself and encourage that from others,” she muses. “Because everybody makes mistakes and you learn from them. The world is rapidly evolving, so you have got to keep up with it. You can’t rest on your laurels.”
Hutchins has spent most of her three-decade career at Newton IM. After obtaining a first-class degree from the Slade School of Fine Art, she joined the then-private fund group as an analyst in 1991.
Though she had no experience in the industry, founding partner Stewart Newton took her and another junior female colleague under his wing, teaching them the ins and outs of managing money. One of the most important pearls of wisdom he imparted was that “investing is a marathon, not a sprint”.
“That has been a very good lesson for me. Because of the type of strategy that I’m running, I’m fully conscious of the fact that the best way of making money is not to lose it in the first place.
“If you get big drawdowns then you’ve got a long way to go to recapturing your losses, and you’ve got to take more risks to do that.”
She left Newton in 2005 to join Capital International, only to return five years later to head up the Real Return team. Hutchins says Newton’s culture is its biggest draw and the reason she has stayed at the firm all these years. “It’s sort of family orientated,” she explains. “As an asset manager, people are important. The are the assets of the business and the idea generation. We really strive hard to retain that working environment, to get the best out of our people.”
The Real Return fund’s objective is to achieve Libor plus 4% per annum over five years before fees with low volatility.
The team blends a top-down and bottom- up approach, using long-term thematic ideas, such as climate change or China’s growing middle class, as a jumping- off point for finding securities that will do well in the current market backdrop. They then supplement this with ideas from the broad host of analysts at BNY Mellon.
Hutchins likens Real Return’s asset allocation to a tyre. An inner core of diversified, return-seeking assets (ie riskier) “does most of the heavy lifting”, while an outer layer of cash, derivatives and other assets not correlated to equities stabilise the portfolio. The problem during the Covid crunch was that even stabilising, “safe haven” assets, such as gold, started behaving like risk assets.
“It wasn’t a surprise that a lot of multi-asset funds did lose value,” Hutchins says. “Our drawdown was not that dissimilar to what we achieved in 2008. But our recapture was very strong.” Asked whether Covid has prompted her to rethink her approach to managing risk, Hutchins is pragmatic.
“First of all, you have to get clients happy with the fact that you’re not going to be able to protect for every small decline in markets, whether it’s 1-5%. What we’re here to do is to help preserve capital in big left-tail events. If you try to constantly preserve capital from one month to the next, then what you do is just you eat up a lot of insurance costs through buying derivatives. It’s just not possible.”
Currently, the fund has around 18% in cash, which is higher than average. This reflects the team’s view that 2022 is going to be more challenging for risk assets. “We do expect there to be more volatility, with rates and the liquidity backdrop tightening as quantitative easing is reduced, and a narrowing of the balance sheets,” Hutchins says. “In that environment, cash is actually really useful, because what you want is to keep your powder dry for those moments when you get volatility, so you can redeploy that cash back into really good assets if they do get sold off.”
Hutchins has zero exposure to developed market government bonds. Though she believes we have reached peak inflation levels at 7%, she doesn’t expect things will revert to the deflationary environment of the past decade.
“I do believe we’re in a different regime and inflation will be structurally elevated. But I do think that, over time, government bonds will probably play a role in stabilising the portfolio.”
Currencies have served as another tool for risk reduction in the portfolio. Though the Real Return fund is globally invested, everything is hedged back into sterling by default. But it can still have floating currency exposure. Its US dollar position was one of the biggest positive contributors to performance last year.
Equities make up over half of the fund currently. Around 45% of that is in growth names, including tech giants Microsoft and Alphabet, which both feature in the top 10 holdings. But Hutchins has a broad mix of cyclical and defensive names as well, such as CME and German industrial gas company Linde. She also has exposure to copper miners to act as an inflation hedge. Sustainable plays like The Renewables Infrastructure Group and Greencoat UK Wind also feature among Hutchins’ largest positions.
BNY Mellon launched a sustainable version of the Real Return Fund in 2018 but the original strategy still integrates ESG factors into its fundamental analysis, with the team weighing up companies’ environmental footprint, labour practices and governance structures Newton currently has 19 responsible investment specialists and last year poached Therese Niklasson from AngloSouth African firm Ninety One to become its head of global sustainable investment.
“We want to be in really sound companies that have got good balance sheets, that have got pricing power that will meet all our ESG credentials and that are in really sweet spots in terms of our thematic views as well,” says Hutchins.
China is another area of interest, despite its chequered past on the ESG front, with Real Return having 3.5% exposure to the region directly.
However, the team has selected holdings that will benefit from the Central Bank of China’s green policy, which promotes investments in infrastructure, 5G and food safety.
“There’s lots of opportunity in China in terms of the population dynamics, the wealth effects and innovation. But you have also got the headwinds of regulation, so you have to price that into your valuations as you think about security selection,” she says.
On the fixed income side, Hutchins has been investing in contingent convertible bonds (CoCos). European banks’ balance sheets are much stronger now, which means CoCos are likely to be called early and convert into equities rather than being perpetual bonds, Hutchins says. “And you can still get quite a decent return from them, particularly compared with cash.”
This article first appeared in the February edition of Portfolio Adviser magazine