The 15 themes applied globally are quite varied, with “debt burden”, “state intervention”, and “population dynamics” of particularly high importance.
Others such as “China influence”, “abundance”, “fire risks” (concerning inflation), “healthy demand” or “smart revolution” can influence both asset allocation and choice of specific securities.
Analysis of how the macro themes play out and their effect on the markets is the key to weathering geopolitical shocks, explained Brain.
Populism and bonds
As an example of a macro trend impacting investment, Brain cited the rise of populism, exemplified by the Brexit vote and US presidential election last year.
“This underlying trend of populism is something we’ve focused on for the last couple of years,” he said.
Even if the populist forces don’t change governments, they influence policies, he explained. It has resulted in loose monetary policy and talk of fiscal stimulus. This in turn is likely to lead to growth recovery and rising inflation, which is bearish for bonds.
The uncertainty about US policy “makes us more cautious,” said Brain. He added that the firm’s use of options was higher now than it had been earlier, since they provide useful insurance and an alternative to a strong commitment to a view.
Bond investors can position themselves for the downturn by taking short positions in government bonds and buying inflation protection, according to Brain.
“We’ve been buying US Treasury inflation-protected securities (TIPS). We’re now looking at European inflation and we’ve bought Spanish and French inflation-protected securities.”
Themes in practice
Newton’s macroeconomic themes are interpreted by investment teams for implementation in fixed income or equity portfolios using proprietary research and models. Some themes play a bigger role in the top-down process, while others may be more relevant in the bottom-up part, which aims to distil the investable universe into a manageable number of names for detailed analysis.
The five-person fixed income portfolio management team, led by Brain and supported by five credit analysts, collaborates with equity and ESG researchers in analysing individual companies for inclusion in the portfolio. The process starts from the universe of 10,000 issues and reduces it to approximately 120 investment-grade and 120 high-yield investable bonds.
“This stage is more subjective,” said Brain. “It’s based on the experience of the team.” Brain has 32 years of experience in fixed income, while the average of his team members is 16 years.
Seventy percent of the team’s time is spent on top-down analysis. The main goal of the bottom-up credit analysis is to ensure the quality of individual companies.
They have two measures of risk control. One is scenario analysis (stress testing), the other is monitoring the performance by linking to realtime pricing. “Typically we make decisions on a three-to-six month horizon at the moment — fairly short term — as we see that the market is changing rapidly,” he said.
Asset- and mortgage-backed securities are excluded from consideration, as are leveraged loans. The fund managers use government futures and options, but stay away from credit default swaps and use convertibles only “occasionally as cheap bonds”, he said.
London-based Newton Investment Management is one of 14 boutique firms under the BNY Mellon umbrella. It manages $65.7bn in assets, of which $4.6bn in fixed income funds and segregated portfolios, and a further $6.9bn in fixed-income assets in multi-asset strategies.
Three-year performance of the Newton Global Dynamic Bond Fund vs its benchmark, the 1-month GBP Libor +2%, in British pounds.
