As a group, how have you been boosting your investment capabilities, including taking advantage of technological advances in areas like artificial intelligence (AI)?
The investment backdrop has never been more complex. To make sense of it for our clients, we believe it is vital to think holistically. In this context, at Newton we have reimagined our research capabilities, enabling investment team members to exploit an unusually wide and innovative range of inputs in their idea generation.
Our multidimensional global research team's work not only consists of fundamental, in-house analysis, but draws valuable insights from thematic, quantitative, investigative, geopolitical, credit, responsible investment and private-market research.
Furthermore, we have crafted a fundamental equity research framework. This approach reorganises classifications into five distinct groups known as ‘pods', in which we categorise companies by characteristics such as maturity, economic sensitivity, and idiosyncratic composition. This approach dismantles the barriers between analysts, facilitating the sharing of ideas, perspectives, and broader collaboration.
Though data is never perfect, we believe a well-functioning investment team, thinking holistically and debating the breadth of research inputs vigorously, can make better-informed decisions.
What do you see as the big opportunities and risks for investors in 2025? How are you responding to these in a particular strategy?
The post-financial crisis era of near-zero interest rates and quantitative easing – an era of ‘free money' – has gone. Now, the backdrop comprises higher interest rates and inflation, with tighter central bank monetary policy.
This, we argue, is a ‘normal' world and one that could see opportunities for income investing in 2025.
In terms of risks, equity markets are concentrated. Some 20% of global market cap is taken up by just seven companies1. This concentration has driven equity markets to historically high valuations.
But in 2025 we will continue to play in an area of the market we think is attractively valued: income stocks. The last time income stocks traded this cheaply was in another concentrated growth-dominated market: the Nasdaq bubble of the late 1990s.
The long history of equity markets suggests that in a ‘normal' inflation and interest rate environment, dividend compounding is key to total returns – and we think that this is just as important in sustainable portfolios.
Dividends encourage better capital allocation from companies; discipline that leads to better earnings growth and a more sustainable business model.
Indeed, we aim to invest in well-run businesses that have both durable financial and competitive positions, can pay dividends, and can manage positively the material impacts of their operations and products on the environment and society.
We group companies from our investment universe into three categories:
- Solution providers – help to solve the most pressing social and environmental issues.
- Balance stakeholders – integrate the highest standards of sustainability into their business models to minimise any negative impacts on society or the environment.
- Transition – committed to switching their business models for defined social or environmental benefits.
By investing in these groups of companies we believe an income fund can benefit from the growing importance of sustainability. Indeed, given how the world has changed, we would argue it makes sense to have balance in portfolios by approaching sustainability through an income lens.
What are your priorities as an asset manager for the year ahead?
We are in a new market regime, where inflation may potentially be higher than in the decade before the pandemic, and economic growth may regain some of its cyclicality. Against this backdrop, long-term investors are increasingly looking for returns that do not rely on trending markets. Others will be seeking products that are aligned with their values, such as sustainability solutions that seek to balance financial, social and environmental outcomes.
In this context, asset managers must rethink how to be a better expert partner to help meet clients' specific goals. At Newton, when we think about how we can unlock opportunity for our clients, we see the starting point not as a benchmark, but as each individual client's goals and challenges. If we properly understand the context our clients face, we believe we can deliver the outcomes that allow them to get to the right place.
This is at the heart of how we at Newton set out our ambition to be the most admired asset manager, as a valued strategic partner to those on the journey to becoming the most admired asset owners.
1Source: Magnificent Seven market concentration is a problem everywhere, not just on Wall Street, Wednesday 31st July, www.cityam.com
