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40 | Investment Week | 28 June 2010 www.investmentweek.co.uk
THE BIG INTERVIEW
NEWTON FIXED INCOME
Paul Brain, the head of ﬁxed
income at Newton Investment
Management, explains how
his team has negotiated
market turbulence, with three
out of its six themes playing
out over a rough period for
ﬁxed income managers
By David To keep your head while
the markets about you are
losing theirs, it helps to
have a reliable map to guide you.
Paul Brain, Newton Investment Man-
agement’s head of fixed income, says his
team has been aided in navigating this
year’s turbulence by the macro themes
at Newton that guide its understanding
of the world.
As at least three of its six themes have
played out – the ride has been as rough
as it gets for fixed income managers.
Since February, Spanish and Greek
debt has been dubbed ‘junk’, blue-
chip UK credit became safer than gilts
and the IMF helped provide a 750bn
(£623bn) rescue package for belea-
guered EU nations. Germany banned
naked short-selling of sovereign debt,
and many practitioners expect Greece
Corporate and sovereign spreads
throughout Europe have widened and
narrowed, sometimes on rumour alone.
The big picture
The themes underlying all this form a L-R: Jonathan Day, Parmeshwar Chadha,
sort of compass Newton managers can Carl Shepherd, Scott Freedman, Howard
refer to through thick and thin. As Brain Cunningham, Paul Brain
explains: “They provide a long-term
orientation – a big picture that avoids a
This stands Newton in contrast to
many bottom-up managers, where the
PAUL BRAIN CV
big picture is overshadowed, if not for-
gone totally in favour of pure security ● 2004 to present: Newton Investment
selection. Newton’s self-explanatory topic of some point this year, supply will over- Management.
Brain says: “We do not pretend to ‘More Government’ ties into Western come demand and Japanese bond yields ● 2001 – 2004: MSG & Partners, chief
cover everything, and we do not suggest politicians taking over banks, organ- will rise,” Brain says. investment ofﬁcer, ﬁxed income.
we can analyse everything, but using ising bailouts and generally becoming It is not the first time he and his long- ● 1995 – 2001: Investec Asset Management,
the themes we can start at a very early more involved in their citizens’ financial standing team members, have seen such formerly Guinness Flight.
stage in the process to see where we affairs. themes evolve. ● 1991 – 1995: Credit Suisse Asset
expect opportunities.” All but one of the seven in Brain’s unit Management – head of currency overlay and
Under its ‘Becalmed’ theme, Newton Population dynamics has been investing generally for seven European ﬁxed income.
foresaw investors would hunt for yield, A further theme of ‘Population or more years, and for at least three ● Has 24 years’ experience in managing
but their search would be “a house of Dynamics’ is widely expected to make years at Newton. ﬁxed income portfolios. His early career was
cards”. its effects felt in Japan, where an ageing Brain has 25 years of investing expe- spent investing in high grade bonds with Credit
As complex debt instruments began Suisse and Baring Asset Management. He sits
to fail, this house of cards collapsed on various committees at Newton and is leader
of the ﬁxed income team.
in 2008 and 2009. Muted rates and
inflation have been the painful hangover “We do not pretend to cover everything, and we do not suggest we
of the pre-crisis debt binge – what offshore and segregated mandates
Newton calls its ‘All Change’ theme.
can analyse everything, but using the themes we can start at a very for larger clients. They also provide
The unwinding was sharper early stage in the process to see where we expect opportunities” fixed income input to Newton’s multi-
and more extensive than Newton asset funds.
had expected. Brain says his team Brain emphasises the collegiate cli-
“instantly bought treasuries and bunds mate his employer fosters – one he
and sold credit wherever possible” on population will turn the savings rate rience, followed closely by Howard Cun- clearly enjoys, sharing ideas within and
seeing it unfold. negative. ningham with 21 years. between disciplines.
The equity teams also offloaded “This faces Japanese government Together, the unit runs £1.5bn in “In 2007 and 2008, our fixed income
banks while taking a defensive stance. bonds with a potentially severe gap. At seven retail funds and £1.6bn more in credit analysts, Howard Cunningham
www.investmentweek.co.uk Investment Week | 28 June 2010 | 41
THE BIG INTERVIEW
and Parmeshwar Chadha, talked exten- also been able to do more work on gilt
sively with the bank analysts about the and government bond mandates, and
credit crisis, for example,” he says. move away from credit, Brain says.
“There is no need to defend your posi- Manager Jonathan Day’s duties have
tion or job – no-one will stick the knife expanded from concentrating on credit
in because of a wrong call, which means to encompass global fixed income, and
you can discuss an example and thrash forecasting and modelling how much
out ideas. has already been priced into securities.
“I have worked in other organisations Parmeshwar Chadha runs New-
where you dare not question a decision ton’s £50.4m Global High Yield Bond
because of house policy or people feeling strategy, and analyses high yield issues
personally threatened.” for the team.
But he quickly adds, when it comes to Carl Shepherd specialises in emerging
Paul Brain has 24 years’ experience managing ﬁxed income portfolios.
actual investing, the buck stops with the market debt and cash funds, while Scott His early career was spent investing in high grade bonds with Credit
fund managers. Freedman joined Newton this year as an Suisse and Baring Asset Management. He sits on various committees at
“There is a danger of becoming a talk investment grade analyst, and Trevor
shop, but we ensure you have a manager Holder writes reports and communicates
Newton and is leader of the ﬁxed income team.
for the team, and for each fund,” he says. with clients.
“We do not have a committee-based Brain runs the £741m International Manager biography
approach to actual decision making. We Bond, £298m Global Dynamic and 2004 to present: Newton Investment Management
believe if you have experienced fund £7.3m BNY Mellon Sterling Bond strat- 2001 – 2004: MSG & Partners, chief investment ofﬁcer, ﬁxed income
managers, you give them every resource egies, and is hunting for an additional 1995 – 2001: Investec Asset Management, formerly Guinness Flight
to come up with the right decisions. investment grade financial analyst. 1991 – 1995: Credit Suisse Asset Management – head of currency overlay and European ﬁxed
“A committee takes a lot of time The team shuns the ‘alphabet soup’ income
coming to decisions, which tend to get of acronyms such as CDOs, CLOs, and Responsibilities at Newton: Investment leader, ﬁxed income; chairman of bond / FX strategy
watered down and be delayed.” RMBSs that wreaked havoc as they group; member of macro strategy group; member of asset class strategy group; member of global
When questioned on how they viewed imploded during the crunch. investment meeting; member of investment committee
the fixed income line-up at Newton, “I will not fund them, nor use complex Qualiﬁcations: Stage II Candidate – Chartered Institute of Bankers.
multi-managers say they appreciate its derivatives. When we invest in govern- able to apply the themes quickly where “We still lean towards strategic
experience and disciplined process. But ment bonds, for example, we will just buy possible,” Brain explains. investing rather than trading, and I
some expressed initial concern after the them, or vanilla exchange-traded deriva- would rather be in the markets for stra-
departure in December 2008 of Stewart tives to track the risk,” Brain says. tegic reasons rather than to trade. I
Cowley, Brain’s predecessor. would rather concentrate my interest-
Brain joined Newton in 2004 to work rate risk in something that is more
with Cowley on global bond funds and liquid, and we have been shifting back
to launch the flagship Global Dynamic into more liquid markets.
product. “The next phase that could alter
Cowley’s departure for Old Mutual things is a rising interest-rate phase like
Asset Managers was a blow for Newton, early in 1994. Less liquid investments
and a few fund of funds managers said will suffer, but I think that is next year’s
initially it was unclear who would do problem rather than this year’s.”
the various tasks on the team. But Brain expects a bear market for fixed
no team members have left since, and income in 2011.
Newton’s funds have retained profile.
Most rank more highly among their The process
peers over one year than they do over Newton’s long-term themes form an
three or five years. overarching framework for the fixed
A composite index of all Newton’s income team’s thinking.
fixed income products has beaten the For Brain says: “The top-down part of our
unhedged J.P. Morgan Global Govern- example, Newton’s process is more important than the bottom-
ment Bond dollar index in 12 of the past global government funds split up part, so if for example there are 150
14 years, and also this year to 31 March. their allocation simply, about 85% to banking names, we will only try to cover 25.”
Only 1999 and 2008 were losing years The advanced countries’ sovereigns, and up to After calculating a fund’s proportionate
against this benchmark.* team is, however, 15% in developing nations’ government allocation within asset types, countries,
considering buying insurance debt. along the yield curve and among sec-
Professional scope against securities defaulting, known as “These are transparent, pure invest- tors, the team conducts detailed analysis
While heading the team, Brain has also credit default swaps (CDSs). ments, which we have not tainted with on individual companies, and whether
pushed his colleagues to extend their “This market continues to evolve and credit investments,” Brain says. they trade cheaply or not compared to the
professional scope. may now be more useful as a tool in “We do not want to have 50 different market.
“When I took over, I thought there hedging credit risk” says Brain. high yield holdings and CDS holdings. We “In 2008, you saw just buying a bank’s
were really good skills in the team, and want to be able to get into markets, but bond was not the end of the story. You
it was ready to move onwards,” he says. Keeping it simple also to get out. We do not want to have to have to know the capital structure, the call
Cunningham, manager of the £69.5m Overall, the trading within the unit is spend two or three weeks unravelling the dates, and whether the loan is variable.
Corporate Bond and the £160m Long kept simple. strategy.” You really must know about the bond issue
Corporate Bond strategies and the “That is important because there are Not surprisingly, market liquidity is also as well as the company.”
driver of the team’s credit process, has lots of opportunities, and we want to be at the forefront of Brain’s mind. Brain has been increasing the exposure
Many of his peers have bemoaned its of his Global Dynamic Bond strategy to
Newton Global Dynamic Bond Composite/performance vs benchmark near evaporation in primary and secondary developed market sovereign debt recently,
credit markets recently, leading to higher trimming its overweight position in credit
3 Months trading costs and a lack of opportunities to do so.
generally. However, Global Dynamic and Interna-
1 Year “We are very conscious of liquidity, and tional Bond have dipped toes in Greek gov-
most of our investments in high yield are ernment debt periodically as yields spiked
2 Years in frequently traded names. We can get a this year, as well as in Irish and Italian sov-
price on everything we own, but the real ereigns. The Greek bond position was sold
3 Years LIBOR +2%
worry is how liquidity could change.” following the announcement of the ECB
Composite fixed income benchmark buy-ins.
Since Global Dynamic Composite Strategy His global bond funds now have 7%
Inception Brain says some traders have re-entered exposure to the Piigs, but have the bulk
markets with dealing teams since the of their European sovereign exposure to
0 5 10 15 20 25 30 beginning of 2009. “However, I would Northern Europe.
not suggest we are back to normal, even
As at 31 March 2010 Source: Newton. Performance is stated gross of fees. The impact of management fees can be material.
if we are slowly getting there. * Source: Newton