Suzanne Hutchins: “The best way to make money is not to lose it”
With 2022 already off to a more volatile start, Newton Investment Management veteran Suzanne Hutchins (pictured) is happy to be at the helm of a ‘one size fits all’ portfolio. BNY Mellon’s real return outfit is one of the few remaining multi-billion pound franchises in the beleaguered absolute return sector.
The nine-person team, led by Hutchins, manages around £14 billion ($19 billion) in global assets. Its £5.8bn UK-domiciled BNY Mellon Real Return fund is now larger than former giants Invesco Global Targeted Returns and ASI Global Absolute Return Strategies, which were hit by a cash outflow in recent years.
A better relative performance certainly contributed to the sustainability of the fund. Hutchins and co-managers Aron Pataki and Andy Warwick returned 20.9% over three years, according to Trustnet, more than double the AI industry average Targeted Absolute Return (TAR) of 9.5%.
But as markets grew choppier, thanks to mixed economic data and inflation jitters, the fund lost ground, falling 3.8% in the past three months, while the fund average absolute return reached 0.1%.
Health and security
Navigating declining markets and unexpected liquidity events such as the Covid crisis is not for the faint of heart, which is why Hutchins says it’s crucial for fund managers to be “in good health. mental and physical” and to “keep it simple”.
“I think you have to have intellectual honesty about yourself and encourage it from others,” she reflects. “Because everyone makes mistakes and you learn from them. The world is changing fast, so you need to keep up. You cannot rest on your laurels.
Hutchins spent most of his three-decade career at Newton IM. After graduating with a first class degree from the Slade School of Fine Art, she joined the then private fund group as an analyst in 1991.
Although she had no industry experience, founding partner Stewart Newton took her and another junior colleague under his wing, teaching them the ins and outs of money management. One of the most important pearls of wisdom he passed on was that “investing is a marathon, not a sprint.”
“It was a very good lesson for me. Due to the type of strategy I use, I am fully aware that the best way to make money is not to lose it in the first place.
“If you get big drawdowns, you still have a long way to go to recoup your losses, and you have to take more risk to do that.”
She left Newton in 2005 to join Capital International, only to return five years later to lead the Real Return team. Hutchins says Newton’s culture is her biggest draw and the reason she’s stayed with the company all these years. “It’s a bit family-oriented,” she explains. “As an asset manager, people are important. These are business assets and idea generation. We really strive to maintain this work environment, to get the best out of our employees. »
The objective of the Real Return fund is to achieve Libor plus 4% per annum over five years before fees with low volatility.
The team combines a top-down and bottom-up approach, using long-term thematic ideas, such as climate change or the growth of China’s middle class, as a starting point to find stocks that will perform well in the market environment. current. They then supplement this with insights from BNY Mellon’s wide range of analysts.
Hutchins likens Real Return’s asset allocation to a tire. An inner core of diversified yield-seeking (i.e. riskier) assets “does the heavy lifting”, while an outer layer of cash, derivatives and other uncorrelated assets to equities stabilizes the portfolio. The problem during the Covid crisis was that even stabilizing and “safe haven” assets, like gold, started to behave like risk assets.
“It was no surprise that a lot of multi-asset funds lost value,” Hutchins says. “Our pullback wasn’t that different from what we did in 2008. But our recovery was very strong.” When asked if Covid prompted her to rethink her approach to risk management, Hutchins is pragmatic.
“First, you need to make customers happy that you can’t protect them for every little drop in the markets, whether it’s 1-5%. What we’re here to do is help preserve capital in big left events. If you’re trying to consistently preserve your capital from month to month, you’re simply eating up a lot of insurance costs by buying derivatives. It is simply not possible.
Currently, the fund has about 18% cash, which is above average. This reflects the team’s view that 2022 will be tougher for risky assets. “We expect greater volatility, with a tightening of rates and the liquidity backdrop as quantitative easing is reduced, and balance sheet shrinking,” Hutchins said. “In this environment, silver is actually very useful, because what you want is to keep your powder dry during times when you get volatility, so you can redeploy that silver into some really good assets. if they are sold.”
Hutchins has no exposure to developed market government bonds. While she believes we have reached peak inflation levels at 7%, she does not expect things to return to the deflationary environment of the past decade.
“I think we are in a different regime and inflation will be structurally high. But I think over time government bonds will likely play a role in stabilizing the portfolio.
Currencies served as another risk reduction tool in the portfolio. Although the Real Return fund is invested globally, everything is hedged to sterling by default. But it can still have floating currency exposure. Its US dollar position was one of the main positive contributors to performance last year.
Equities currently make up more than half of the fund. About 45% of that is in growing names, including tech giants Microsoft and Alphabet, both of which are in the top 10 holdings. But Hutchins also has a wide range of cyclical and defensive names, such as CME and German industrial gas company Linde. It also has exposure to copper miners to act as an inflation hedge. Sustainable players like The Renewables Infrastructure Group and Greencoat UK Wind are also among Hutchins’ most important positions.
BNY Mellon launched a sustainable version of the Real Return Fund in 2018, but the original strategy still integrates ESG factors into its fundamental analysis, with the team assessing companies’ environmental footprint, labor practices and governance structures . Newton currently has 19 responsible investment specialists and the latest poached Therese Niklasson from British-South African firm Ninety One to become its global head of sustainable investments.
“We want to be in really healthy companies that have good balance sheets, that have pricing power that will meet all of our ESG benchmarks, and that are also in very interesting places in terms of our thematic views,” says Hutchins.
China is another area of focus, despite its checkered past on the ESG front, with Real Return having a 3.5% direct exposure to the region.
However, the team has selected holdings that will benefit from the Central Bank of China’s green policy, which encourages investment in infrastructure, 5G and food security.
“There are a lot of opportunities in China in terms of demographic dynamics, wealth effects and innovation. But you also have regulatory headwinds, so you need to factor that into your valuations when thinking about stock picking,” she says.
On the fixed income side, Hutchins invested in contingent convertible bonds (CoCos). European banks’ balance sheets are now much stronger, meaning CoCos will likely be called early and converted into equities rather than perpetual bonds, Hutchins says. “And you can still get a pretty decent return from them, especially for the money.”
This article first appeared in the February issue of Portfolio Adviser magazine