Bond principles

Each month we bring you the opinions of the managers of the funds most likely to be selected for pension portfolios through external fund links or Sipps. This month - Newton International Bond Fund

Launched in 1991, the £590m Newton International Bond fund aims to maximise the total return from income and capital growth in the global bond markets through investment, predominantly, in international securities whilst providing a six-monthly income and potential for capital appreciation. The fund has a high exposure to foreign currencies which can benefit total returns when UK Sterling declines. The overriding mandate of the manager is to protect the real value of client’s money and seek an absolute return better than available cash rates.

With currently over 75 per cent invested in AAA-rated bonds, the fund is conservative in terms of credit exposure; we believe it is an ideal holding for investors aiming to gain exposure to the international bond and currency markets with a minimum of credit risk as part of a balanced portfolio of investments. Having been awarded a AAA rating from Standard & Poor’s Fund Management and OBSR, the Newton International Bond Fund is also a consistent market leader in terms of total returns.

So what do we see as the outlook for the sector? The generation of excess is at an end and the generation of austerity is here, some would have us believe. The reality is that what goes around comes around and the markets are currently recouping profits that never really existed from financial engineering (to give it a dignifying set of words). There is a price to pay for our delusion and that will take the form of reconstruction and regulation.

For sure, governments in the US and Europe will increasingly intervene in the free markets to underpin a capitalist system that came close to seizing up in October. Make no mistake this is a crisis of confidence not seen since the 1920’s and, in the near-term quality, will triumph over credit.

At the same time there are global influences at work that will see a historic transfer of wealth from the west to the east. The world now breaks down into two groups: those who have money and those who have debt. The profligate west is about to pay the price for generation of assumptions about consumption and material wealth which will see eastern economies rise in their ascendancy. Chief amongst the long-term losers will be the US who has just awarded itself $750bn of other people’s money (the US has a negative savings ratio) which will turn out to be too little in the final analysis. Look out for the US dollar to decline again and US bond yields to rise in the face of the onslaught of massive supply. The UK will fair no better being dependant on foreign capital and the income from financial services to make its way in the world. Meanwhile, the growing and increasingly consumerist economies of the east have the money to sponsor domestic consumption and growth whilst we struggle with debt. The historic decline of western currencies (including Sterling) relative to the east is set in train no matter the short-term irrationality of the currency and bond markets.

It is at times like this that Newton’s investment process based on its thematic approach (long-range ideas that have a bearing on the equity, bond and currency markets) provides a broad global perspective which is invaluable. Our themes point us to the characteristics we want to see in our investments in the post credit bubble era. Meanwhile, the thematic framework, more generally, reminds us of the most important trends which are shaping the investment landscape and helps to identify opportunities and risks.

We have advocated caution in our portfolios for several years, and now would not seem to be the time to change that view. Capital markets will survive, however, albeit in an altered and more highly regulated form.