Q: What is the history of global investing at Newton? A: For over thirty years at Newton, we have been managing money on a global basis across all of our strategies. We are active investors, and are committed in our securities selection. We focus on long-term objectives, and we use a global, thematic investment approach. For example, one theme upon which we focus in particular has been the gradual but steady accumulation of debt in the developed world. The debt has been building at all levels in the economy – government, corporation and consumer. Q: What drives your global investing philosophy? A: Our investment philosophy is driven by our long-term outlook and we believe that active management is the best method of achieving our clients’ objectives. Global perspective also helps us to assess portfolio risk in a relevant, holistic manner. Newton’s global investment themes provide a broad framework to focus our analysts and portfolio managers on what we consider to be the most important long-term trends and industry developments shaping the global economy. We are active investors. We undertake rigorous analysis of company fundamentals and valuation metrics. In our multi-asset portfolios (such as the Dreyfus Real Return Fund) we compare asset types on a relative basis to identify the best opportunity and value over the longer term. Overall, we are driven by only one ambition, which is to create wealth for our clients. Newton’s investment process, the way we organize ourselves, the way that we debate and discuss securities and our investment philosophy are all anchored in this client-centric philosophy. Q: What do you include in your global footprint? A: In the Dreyfus Global Real Return Fund, we include every single market and every type of asset class. In this absolute return fund, we invest predominantly in liquid, traditional long-only assets, using derivatives to protect capital value and reduce volatility. As we observe that investment has become truly global, and we think it is very important to conduct analysis and assess opportunities and risks across asset types, asset classes and geographies. The Dreyfus Global Real Return Fund offers a diversification for those who are looking to invest in non-correlated assets, with low volatility and low risk. The strategy was created in 2004, and now has more than $17 billion invested. Q: How do you approach global investing? Are you contrarian or opportunistic? A: The Dreyfus Global Real Return Fund is not constrained by adherence to any benchmark, and is comprised of high conviction investment ideas. There are of course market areas and countries where we do not invest, as we select only those securities which meet the requirements in terms of both long-term objectives and quantitative analysis. The Fund focuses on a five-year time horizon. It is certainly not a trading fund: we seek to build “core” positions for the long-term, and turnover, particularly within the return-seeking core, tends to be low. This approach reflects the fact that the investment themes upon which we focus, such as debt and demographics, do not tend to change very quickly. We do not buy value stocks and we are not a growth manager either; we are just buying securities we think will offer good long term value but with capital preservation, as well. The Fund is not style biased towards either “value” or “growth.” We invest in securities we think will offer good long term value, using derivatives primarily for capital preservation. We are disciplined regarding the price at which we want to buy a security and the price at which to sell. In the current global economic environment, we look for businesses that have greater predictability in earnings, strong balance sheets, that are well-managed, and that are not over-leveraged. Q: What kind of themes and securities you consider for investment? A: One of the most prevalent themes that is overriding markets today is the fact that we have excessive debt in both the developed world and emerging markets. This “debt burden” means both governments and individuals have less money, it means that consumption is likely to be dampened, and the interest cost on that debt burden will be a matter for concern. In addition, central bank policies are forcing investors to take extra risk and pursue riskier asset classes in order to meet their return requirements. In this low interest rate environment, we must consider very carefully how to generate a return. The type of security characteristics we would look for are those companies which may, for example, offer sustainable dividends, which have strong cash flows, or perhaps selective higher yielding debt markets. We find that there is much sub-investment grade debt from quality companies that are more cyclical and that are backed by high quality and sufficient assets, which compare very favorably with the low current yields on traditional government bonds. Our debt burden investment theme encourages us to think very laterally about how to generate income, whether it is through dividends, whether it is through coupons, whether it is through cash flow generation. Another example of a theme which influences our investment thinking is the current interest rate regime and the experiment of creating huge amount of new money through central banks. We have not been in a situation like this before, and this experiment is likely to lead to unintended consequences. While high liquidity could ultimately be inflationary, the lack of growth, the debt burden and the demographics may contribute towards deflation. We do not anticipate considerable inflation in the near future, but assets such as gold are likely better to protect against inflation, as are index-linked securities or utilities that have an inflation-linked component. In a deflationary environment, at times, bonds and cash may help to protect real value. The Dreyfus Global Real Return Fund has the flexibility to adjust positioning to reflect our long-term outlook, and to smooth the impact of short-term volatility. We anticipate that the investment environment will continue to be subject to bouts of volatility, and that business cycles will be much shorter. As we look across asset types, we ask where the relative value and opportunity is to be found, and what are the big long game changers that are happening in the market. Q: How is your research team organized? A: One of the key ways in which we have been very successful is by deliberately organizing ourselves in one location, in one building, on one floor. This reflects our core investment belief about having long-term, global perspective. We have over 75 investment professionals on this one floor in an open plan office. We have in-house industry research analysts who are career analysts that really understand the sectors in which they specialize. We also have specialists in, for example, bonds, economics and currencies. This collaborative arrangement promotes a pooling of idea generation, creating a challenging investing environment and a global perspective. Newton’s sole activity is to manage money; we are one team and we are all incentivized by the success of Newton. Our analysts do not have to provide universal coverage. We look for five or 10 securities within each area where we think there is real long term valuation anomaly, and which are hopefully very good businesses as well. We have four research focus teams which are depicted by the debt theme, technology and innovation, energy challenges and politics and demographics. Our themes are active and they evolve over time, forming a long-term investment framework for security analysis and selection. So every individual at Newton has an understanding about how our investment themes develop. We have investment group meetings every day, a global investment group meeting and also we have specific focus groups on individual securities. Our analysts are organized in terms of global sectors. There is close communication and interaction between the industry analysts and our credit analysts, so that when we are investing in a company we take an active decision as to where we invest across the capital structure. We look across asset types and across geographies, and analyze the depth and breadth of the individual security fundamentals. The ultimate decision-maker on the portfolio is the portfolio manager, myself on the Dreyfus Global Real Return Fund, but I work within the Real Return team, of which there are eight of us, and we contribute collectively to discussions and decisions. The research analyst is responsible at the individual security level; the portfolio manager is responsible at the portfolio manager level and for the portfolio results. Q: Can you expand on your real return focus? A: The objective of the Dreyfus Global Real Return Fund is to deliver U.S. dollar LIBOR plus 4% per annum annualized over a five-year rolling basis. What we would hope is that would beat inflation over the longer term and evidence does support that, over 30 years, LIBOR plus 4% has more than beaten inflation, and also has beaten both bond and equity returns, with lower volatility than equities. We aim to generate a real return. This is called a “real return” fund, but it should not be confused with “real assets,” in terms of “real asset strategies” in the US marketplace. We are talking simply about absolute returns, which does not necessarily involve investing directly in real assets such as real estate or commodities. We would argue that there are many different types of inflation out there, for example asset inflation and wage inflation, both of which have been very different over the past year. We think this has been exacerbated by quantitative easing. What we aim to do in this environment is to grow capital over the longer term, and we have chosen LIBOR plus 4% as a target which should ensure that the Fund will achieve positive inflation-adjusted returns over the long term. LIBOR plus 4% is low at the moment because interest rates are very low, but over the longer term, should the economy normalize, then we would expect LIBOR to be close around its long-term average of around 3% or 4%. Q: What drives your portfolio construction process? A: We have a single portfolio approach and we think about it in two parts: a return-seeking core, and an outer layer. In the return-seeking core, we hold are securities that we think will deliver LIBOR plus 4% p.a. without too much volatility. Meanwhile, the outer layer contains protective positions, through which we aim to dampen down volatility and preserve capital. The securities within the core are likely to change over time, which is partly driven by price. Right now, for example, in core we have around about 60% in equities, with minimal exposure to more cyclical or financial companies. The return-seeking core will not perform like an equity market, nor is it intended to do so. We make up other parts of the return-seeking core with high yield bonds which do tend to be issued by more cyclical companies; here, we are taking less risk by owning the debt rather than the equity. The size of that core depends on valuations of assets, the riskiness of the backdrop and the long-term themes and trends. Currently, the core represents about two-thirds of the entire portfolio, and we have implemented around 15% protection on that core in order to aim to withstand market declines. In terms of the outer protective layer, this is again determined by individual security selection. We believe that there is no point in diversifying for the sake of diversification, so we will buy only those diversifiers which add value. Obviously, protection comes at a cost; we look at that cost in terms of volatility and we compare it with other ways in which we can offset or reduce risk, whether indirectly through currencies, whether through bonds, whether it is call options or whether it is through gold. We assess constantly the relative attractiveness and also the correlations between asset types in order to understand how the portfolio will behave in certain market conditions. Q: Is the portfolio guided by a benchmark? A: No. Investors should focus on the long term objective of the Fund, which is LIBOR plus 4% with lower volatility than equity markets. In rising markets, investors may expect the fund to participate, but it will not do so to the full extent; in falling markets, equally, it should not fall by the same degree as markets, which reflects its facet of capital value protection. Q: How do you define risk and how do you control it? A: The way that we think about risk is entirely embedded throughout the investment process. We argue that the risk of losing money is crucial to long-term investment returns, and that backward-looking approaches and over-reliance upon models created with historic data may not provide a comprehensive, practical understanding of risk. Risk is embedded in our investment process through our long-term global investment themes. We conduct due diligence, we meet the management, we understand the products, the competition, and the valuation of these securities, all of which make a valuable addition to purely quantitative measures of risk. As an active manager, we have the capability of outperforming the market over the long-term by managing risk, and carefully selecting securities to create a portfolio of uncorrelated holdings. There are risk controls within the Dreyfus Global Real Return Fund portfolio guidelines, to ensure diversification. In addition, we have an independent risk analysis group which uses quantitative risk analytic tools.