Paul Flood, head of multi-asset at Newton Investment Management, talks to Piyasi Mitra and offers insights on global cross-asset trends and how he is strategically positioning portfolios amid current macroeconomic shifts.
Paul Flood has been running the multi-asset team at BNY-owned firm Newton Investment Management for over 20 years. With a focus on the real assets infrastructure space on the lower-risk end, he tells us how the firm is positioning its multi-asset portfolios to take advantage of global macroeconomic drivers.
The past decade with zero interest rates and quantitative easing has kept the management away from the bond market. Flood says that while the firm initially maintained low bond allocations, it has gradually increased them over the past 12 to 18 months, starting with the shorter end of the bond market due to concerns about the longer side of the yield curve and the persistence of inflation.
The environment has recently become somewhat disinflationary, driven by China’s focus on boosting manufacturing over consumer demand. Flood notes that this shift has led to reduced capacity utilisation and the West facing deflationary pressures from China’s manufacturing sector. “This tug of war between inflation and deflation is influenced by long-term factors like deglobalisation and the return of manufacturing to the West, which add upward inflation pressure,” says Flood. However, he adds that this doesn’t negate the shorter-term impacts seen with the economy’s cyclical nature.
Allocation shifts
“We’ve increased our bond allocations with a shift towards the longer end of the yield curve while still maintaining an underweight duration. Our equity positioning is focused on aligning with long-term thematic drivers,” he says.
Real assets, alternatives and listed infrastructure have seen reduced allocations due to bonds competing more effectively for client capital, says Flood. “While real assets and alternatives offer inflation-linked revenues, they fall between bonds and equities in risk profile. Coupons are obligatory, barring bankruptcy, whereas dividends are more discretionary.” He acknowledges strong dividend growth in certain real assets, noting they are excellent diversifiers for a multi-asset portfolio, especially in rising inflation and a strong economy.
“Bonds are better diversifiers, offering a fair return rather than a compelling one. While some talked about the death of the 60-40 portfolio, we saw its rebirth.”
He notes that post-Covid, strong economic data has been a “negative factor” for the bond market. “However, as seen in 2022, alternatives performed well due to their inflation linkage, benefiting from higher-than-expected inflation. While equities and bonds were negative in 2022, alternatives and real assets were positive,” says Flood.
Over the last 12 months, the situation has reversed—equity markets have been positive, bond markets more stable, and some real assets have pulled back.
Reflecting on the 1970s, real assets were highly beneficial in multi-asset portfolios. Newton Investment Management continues to maintain reasonable allocations in this area as a hedge against potential long-term inflation. According to Flood, future concerns may centre on the inflationary impact of deglobalisation and large fiscal deficits of Western governments.
“Bonds are better diversifiers, offering a fair return rather than a compelling one,” says Flood. “While some talked about the death of the 60-40 portfolio, we saw its rebirth.” With yields now at 3%-5% in the West, bond allocation is more favourable than during near-zero yields. In contrast, a growth scare would likely impact equities, especially cyclical sectors. He stresses central banks’ aim to return inflation to 2%. If confidence in them falters, the bond market could suffer, boosting demand for real assets as inflation protection.
As the world moves online, the real estate market is adjusting. Rising vacancies over the next 5–10 years could create better opportunities, so the firm has begun reintegrating lower-risk real estate funds into its portfolio. Ideally, more pressure from tenants on property companies could lead to a recalibration of property valuations and net asset values, especially during a recession.
“Leverage loan to values work against you if you’re repricing property down. If companies must do rights issues and dilute shareholders, it’s detrimental to long-term investment,” says Flood.
He also highlights the growing exposure to private equity, noting the uneven playing field in private markets, which carry higher leverage and risk compared to daily-marked public markets. Fair comparisons require matching risk metrics on a like-for-like basis, with quarterly evaluations for both private and public assets. For listed infrastructure and real estate, focusing on net asset value rather than share price is more accurate, he adds.
Preqin data suggests that listed infrastructure has kept up with private infrastructure and with less leverage over the longer term. “For our open-ended fund, we can only invest in listed securities due to liquidity constraints — a key consideration for institutional clients. It’s about risk appetite and the duration they are willing to lock up their capital for,” says Flood.
“The build-out of electrification across renewables, electric vehicles, AI, and data centres, along with bringing semiconductor manufacturing back to the West, is significantly increasing electricity demand… These are beneficiaries often overlooked, which is why we are fairly overweight on the industrial side.”
Ageing and domino effect
The build-out of electrification across renewables, electric vehicles, AI, and data centres, along with bringing semiconductor manufacturing back to the West, is significantly increasing electricity demand. Industrial companies benefiting from these trends are supported by initiatives like the USA’s Inflation Reduction Act, which accelerates the clean energy transition, and the Chips Act, which boosts domestic semiconductor research and manufacturing.
“The entire supply chain benefits — from earth-moving equipment and electrification to grid infrastructure and air conditioning units for data centres,” says Flood. “These are beneficiaries often overlooked, which is why we are fairly overweight on the industrial side.”
Newton Asset Management’s ESG focus targets sectors benefiting from decarbonisation, particularly in natural capital and industrial areas. This approach supports ESG goals and creates global growth opportunities for decarbonisation solution providers, including in emerging markets.
The twin threats—’not-so-headline-grabbing yet’—that loom large in today’s world are ageing populations and the growing demand for healthcare. Over the next decade, about 300 million people, who are now aged 50 to 60, are set to leave the Chinese workforce, cites Flood.
One concern is how the US will manage healthcare costs, which could strain the fiscal side, making it crucial to strike the right balance. Flood is eager to see the policies that emerge after the US election, and anticipates big spending from both sides, with the bond market likely pressuring fiscal discipline. “We also see opportunities in Asian life and health insurers, beyond tech and AI,” says Flood.
