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Newton Believes 'Real' Returns Require a New Perspective

Report by BNY Mellon boutique says financial repression set to continue as interest rates remain low

According to Newton*, part of BNY Mellon Asset Management, investors seeking 'real' returns over inflation need to look beyond index benchmarked funds and re-evaluate their attitude towards risk. Newton believes the scale of the western world's debt-related challenges, and the weakness of its economic growth, means that the foreseeable future will be one characterised by lower returns and greater asset price fluctuations.

Iain Stewart, investment leader - global funds, at Newton*, comments: "In the current investment environment if investors desire a reasonable 'real' return they must accept more risk, in volatility terms. The current debt crises in the western world are so intractable that it is highly likely that 'financial repression' in the form of both long and short-term interest rates being set by the authorities at below the rate of inflation will continue to be a preferred policy for some time to come."

Newton's report discusses that investors are not currently receiving a real above inflation return from so called 'risk free' assets such as cash and government bonds and bills. In light of this, the report states that investors' risk outlook should return to more traditional concerns about losing the real value of their money rather than simply missing out on gains.

Stewart continues: "We believe that focusing on 'absolute' returns, rather than setting return objectives in relation to a benchmark, makes sense if the investment outlook continues to develop in the way we anticipate. It is likely we are in the early stages of a major transition, which will see a move away from the narrow specialisation and index based approaches encouraged by the bull market from the early 1980s until the early part of the last decade, towards more traditional, multi-disciplinary styles of investment."

Paul Brain, investment leader for fixed income at Newton*, adds: "Accepting more risk in volatility terms does not mean holding a portfolio that is more risky in the traditional sense of permanent diminution of value. Newton's equity and fixed income absolute return investment strategies look at risk in its broadest context. We aim to strike a balance between building a core portfolio of traditional assets, with the ability to produce an attractive total return in most economic circumstances and putting in place an 'insulating layer' of other assets, currencies and simple option strategies to hedge a range of scenarios, reduce volatility and protect capital."

Brain concludes: "For a number of years we have argued that investors are experiencing a transition to a different - but probably more 'normal' - investment environment, characterised by lower returns and greater asset-price fluctuations. Such ideas encouraged us to develop investment strategies that define why we believe that a focus on 'absolute' returns makes sense."