Stewart blames US downgrade and gold stocks for dip in form

£4bn Newton Real Return suffers short-term performance dip on misjudged currency bets.

Newton’s Iain Stewart has blamed bets on gold miners and the euro for a period of “disappointing” performance from his £4bn Real Return fund.

The fund has returned more than double the Absolute Return sector average over three years, but Stewart said he is disappointed with the portfolio’s short-term returns.

“We have been trying to build an array of protective positions that would help us when risk assets fall and volatility spikes, but this time around we did have some disappointment on how they have worked,” Stewart said.

The manager said a significant exposure to gold mining equities and a short bet on the euro contributed to the dip in performance, which saw the fund fall a “depressing” 5% year to date, compared with a sector average 1% drop, according to data from FE.

“We currently have a total 10.5% allocated to gold, out of which 8% is in gold mining shares, which have not performed in line with the general asset class.”

A long dollar/short euro option has also failed to perform for the fund.
“The single currency has held up well during the sovereign crisis and has not depreciated against the dollar, partly because of the US debt ceiling issue and the downgrade by S&P,” he said.

However, Stewart is sticking with both positions as he expects they will shortly start to perform.

The manager also has about 10% in protection, including call options on government bonds, and 5% in Norwegian sovereign debt.

Stewart is aiming to improve the fund’s numbers by playing the cyclical industrials, healthcare and telecoms sectors, but said he does not intend to increase total equity exposure from the present level of 50%, excluding his holdings in gold miners.

“At a time when investor sentiment flip-flops from inflationary risks to deflationary risks, we cannot be sure of what we will have to hedge against,” he added.

Meanwhile, he said taking cash up from 16% to 20% since April will enable him to add to areas where he has “a reasonably high conviction”.

He has bought telecom firm TDC Denmark, where he sees a 10% upside on top of its 10% dividend yield, and has added to positions in Swiss agribusiness Syngenta, German pharmaceutical Bayer, and Smith & Nephew in the UK.