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How global fund selectors are pandemic-proofing their portfolios

From short-term strategies to thinking about long-term tactics, fund buyers reveal what they are doing to stay ahead in one of the most difficult years on record.

As the world tentatively returns to normal, Citywire Selector spoke to 13 top fund selectors across the world about how they are approaching their asset allocation in this environment.

What have been the biggest changes or manager switches they have made over the first half of 2020? And if they didn’t do any tweaking, who did they stick to and why?

Scroll through the slides to read their views.

These comments appeared in the September edition of Citywire Selector magazine.

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As the world tentatively returns to normal, Citywire Selector spoke to 13 top fund selectors across the world about how they are approaching their asset allocation in this environment.

What have been the biggest changes or manager switches they have made over the first half of 2020? And if they didn’t do any tweaking, who did they stick to and why?

Scroll through the slides to read their views.

These comments appeared in the September edition of Citywire Selector magazine.

Oscar Blanco

EFG Asset Management (UK)

In recent weeks we’ve been looking at distressed assets. Since the Global Financial Crisis, low interest rates and the search for yield have led to significant growth in debt and negligible default rates. The extreme market conditions and price dislocations in sovereign and corporate credits late in Q1 led to distressed debt quadrupling to nearly $1tn.

The opportunity set this creates for managers specialising in distressed securities warrants our attention. We think it is wise to look at a range of differing approaches, asset class preferences and geographical focuses, and expect the cycle to play out over a multi-year period with high-teen performance expectations.

Across other existing themes, we have evaluated those managers that have been unduly impacted by the equity market sell-off and added to them. One global manager with high net exposure was protected by index hedges, with gains recycled into losing long positions. Elsewhere, a China-focused manager suffered earlier in Q1 but has since rebounded strongly by also adding to high-conviction names. The timing of these funds’ drawdowns in Q1 helped smooth the monthly volatility.

Rafaël Anchisi

Bordier & Cie (Switzerland)

On the back of central banks’ rapid and large-scale response to Covid-19, the threat of inflation is emerging again. However, we took a contrarian stance and removed all our inflation-linked bond funds once the market rebounded after the March sell-off. Actually, the decision wasn’t initially based on ‘inflation

or not inflation’, but we were first concerned by the valuation and the relative risk: a negative yield-to-maturity coupled with a 13 years’ duration. We also feel those products may generate a misunderstanding between private clients’ expectations and the negative mark-to-market movements over the short run in the case of an increasing inflation environment.

Because market uncertainties remain high and spreads are still wide enough in some other fixed income segments, we favour more active and flexible managers who are navigating on a shorter duration mode and where inflation concerns are already taken into consideration.

Pol Tusquets

Trea Asset Management (Spain)

The correlation between traditional assets is increasing, and the classical dichotomy between equity and fixed income is outmoded. Fixed income also no longer pays the coupon levels it used to. That is why we must look for different strategies that really decorrelate from each other to better balance our portfolio.

At the end of 2019, we incorporated a position in gold to increase decorrelation and diversification, knowing that it works well as a safe haven. This quality has been demonstrated in a tumultuous 2020 where gold has been the best-performing asset in our portfolio.

At the end of the year, we slightly increased our exposure to absolute return funds, specifically long/short equity and market neutral. In the months ahead we might think about raising exposure to the US dollar. The rise of debt in governments and some sectors

in recent quarters shows that it continues to be the main currency for financing on a global basis and therefore serves as a refuge in times of high volatility. European equity long/short is another strategy we are monitoring, taking advantage of the huge spread of valuations, combining long and short positions in a portfolio with attractive levels of risk for moderate portfolios.

Florian Rainer

Matejka & Partner Asset Management (Austria)

We have rarely seen such market volatility as in the first half of 2020. First, there was the Covid-inspired crash and now it seems as if a V-shaped recovery is being priced in. We have been invested in products such as the Artemis US Absolute Return fund or the La Française Trésorerie fund.

Both served as cash substitutes to a degree. The performance of these products was satisfactory, but we sold them after the market slump in order to invest more in the theme of gold, on which we have been very bullish.

In doing so, we allocated to the Invesco Physical Gold ETC and Bakersteel Global Precious Metals funds. We remained invested in strategies that have been part of our portfolios for a long time and which have already performed exceptionally well again this year, such as the T. Rowe Price Global Focused Growth Equity fund and the Franklin Global Convertible Securities fund.

Sandro Vandoni

Banca del Piemonte (Italy)

The first six months of 2020 have foregrounded an asset class neglected for years by our retail clients: the euro corporate investment grade bond. Before the pandemic, this asset class guaranteed very low, if not negative, yields to maturity and was therefore poorly represented in our model portfolios.

The global health and financial crisis, combined with the continuous monetary and fiscal support given by the central bank, has led to widening of spreads which provided an interesting entry point of accumulation. Yields have returned after years in largely positive territory, favouring a good carry.

From February to June, this asset class has more than doubled its weight in our model portfolios, becoming, especially for portfolios of medium risk and time horizon, the most important asset class and is well represented by Schroder’s euro corporate strategies.

Another profound change concerns the equity component. The peaks in equity volatility reached between the end of February and the beginning of March have spoiled the time series and consequently drastically reduced the equity portion of our quantitatively-optimised model portfolios.

The only asset class that did not suffer weight cuts was North American equity, which showed resilience in rebounding. Driven primarily by the technology sector, US equity rebounded vigorously and confirmed itself as an essential building block of any medium- to long-term portfolio. Morgan Stanley’s Global Brands and US Advantage funds have been our workhorses.

Monika Netelenbos

Gonet & Cie (Switzerland)

We entered this crisis with a prudent asset allocation, and were therefore able to stick to our convictions and only made minor changes to our investments during the correction. However, we decided to capitalise on wider spreads in more risky fixed income areas, by adding the Neuberger Berman Emerging Market Hard Currency Debt fund to our portfolios on 15 May. Since the rates in developed markets have fallen, especially in US, the hunt for yield will be returning to the forefront.

Emerging market economies have shown resilience during the crisis, but some countries may be more fragile. For this reason we favour active managers who can take advantage of the opportunities. Our investors have appreciated the great resilience of the Nordea 1 - European Covered Bond fund, invested in asset-backed securities. We also recommend the NN Green Bond fund, composed of both government and corporate debt, which aims to raise finance for positive environmental projects.

Luca Bonifazi

UBI Top Private (Italy)

Over the first half of 2020, we made two main changes. At the beginning of the year, we had an underweight equity position in our portfolios and in mid-January, for hedging purposes, we took a position in gold, and considered $1,550 an ounce as an interesting entry point.

In mid-March, during the market collapse, we bought equity, closing our underweight, since we firmly believed in the power of monetary and fiscal policies and in their ability to act promptly and, for the first time, in a truly coordinated way. The pandemic was not anyone’s fault, so we were pretty sure the support of central banks and governments would be unconditional.

In mid-March, we mainly bought US equity, given the historical resilience that characterises this area in a downward trend and its ability to rebound in the recovery stages.

With reference to gold, we decided to keep the position open in January even after it reached the threshold of $1,800 an ounce. This was because we expected the opportunity cost of holding gold to remain attractive given the forecast of low/negative rates for the long term.

In addition, gold, remains the safe haven asset par excellence, and will continue to be supported by uncertainty regarding the health emergency, given that in some areas of the world, the spread of the virus is still far from being under control, while a second wave is feared in others.

Saar Kimel

Oppenheimer (Israel)

We moved significant assets to a global growth hedge fund run by Xanthus, as we thought the importance of technology and AI would continue to increase, despite the pandemic. Xanthus has an experienced manager with a proven record of picking winners and losers in this tech revolution.

We have tilted portfolios towards growth for similar reasons, particularly to managers with larger weightings in tech. Examples include: the Alger Capital Appreciation, Alger Weatherbie Specialised Growth and Vanguard International Growth funds. We also moved some of our cash to equities as we believed markets would bounce back and were oversold at the end of 1Q20.

Will Shum

iFast Financial (Hong Kong)

High-profile fund managers in the China equity sector dropped towards the bottom of the first-half performance list. During this period, the MSCI China index, which covers a broader investment universe, outperformed Hang Seng China (Hong Kong-listed) 100 index, which is dominated by old economy stocks, by more than 11 percentage points.

This raised discussions on whether the traditional investment approach still works. The outperformance of A-shares and American depositary receipts against H-shares also raises the issue that traditional Chinese equity funds that cap the weighting of non HKEX-listed stocks may not be able to fully capture investment opportunities, especially in the new economy sector.

Therefore, we prefer strategies with the flexibility to invest in the entire China equity universe and with the capability to identify the exciting opportunities in the new economy sector, rather than picking familiar names from the benchmark. This is the reason why we switched to the CUAM China-Hong Kong Strategy fund in the first half of 2020.

Franca Pileri

Quaestio Capital (Italy)

During the volatility caused by Covid-19, we kept stable allocations to our core portfolios and preferred to move risk factors using mainly derivatives for hedging purposes. In the past few months, we have emphasised diversification and underlying liquidity, especially in the credit component of our portfolio. In this respect, during the first half of the year, we closed a relationship with a portfolio manager operating in the cash-enhanced field, who had a very aggressive stance on spreads and currencies, which we considered unsuited to the new market environment.

Conversely, we appreciated bottom-up and quality-oriented equity managers who achieved brilliant relative performances such as Sparx Asset Management and Prusik Investment Management, managing respectively the equity Japan small cap and Asia ex Japan concentrated mandates.

Elsewhere, we improved our funds’ ESG investment policy. We believe companies following these principles will achieve better risk-adjusted performance, so we recently selected Impax Asset Management as a new portfolio manager responsible for a global equity ESG thematic mandate.

Giuliano Rossi

FIA Asset Management (Luxembourg)

Our worst contributors since the pandemic broke have been equities and, on the fixed income side, high yield and emerging market debt. Meanwhile, cash and our foreign currencies (yen) partially hedged the portfolio. At the beginning of the year, our allocation was already positioned more defensively than peers.

Throughout the quarter, we reduced risk, especially in emerging markets and thematic equities segments. Among fixed income, we increased the weight of government bonds and social bonds, since these strategies proved quite resilient. Cash was increased as well, in an attempt to better protect the portfolio in case of further drawdowns in other assets’ value. We also added thematic funds such as clean energy, biotech and infrastructure that are less correlated to the markets.

Thomas Romig

Assenagon Asset Management (Germany)

The first six months of 2020 posed a significant challenge to market participants. To generate differentiated returns, multi-asset portfolio managers had to act flexibly and decisively in adapting to quickly-changing circumstances. Our proprietary set of indicators and our well-established industry network successfully supported us in making the relevant investment decisions.

As the virus started spreading outside of China at the beginning of February, we proactively reduced equity and credit exposures. We were therefore able to significantly limit our drawdown in these difficult markets. On top of our risk management efforts, the absolute return positions we held, such as the Eleva Absolute Return Europe fund, also helped to stabilise our portfolio returns.

After authorities announced unprecedented fiscal and monetary stimulus to counter the short-term consequences of the situation, we used our flexibility to decisively scale up these positions again at the end of March. These changes enabled our strategy to recover quickly from its drawdown by the end of April. Overall, we believe that policy-related aspects are becoming an increasingly dominant factor for markets. Therefore, relying on the benefits of diversification within an active multi-asset strategy will not suffice going forward.

Peter Kruyniers  

ING Belgium (Belgium)

So far this year we have shifted towards safety. We reduced our equity exposure and increased our focus on quality and sustainability. Therefore, we adapted both our in-house fund of funds and our preferred partners’ funds. Here are three funds we have been recommending in H1 2020. First, the Franklin Technology fund, whose central theme is digital transformation.

The strategy is well positioned to benefit from the ‘everything from home’ trend. Its experienced team is based in Silicon Valley and has good access to established and emerging tech players. Second, the NN (L) US Credit fund invests in the full range of investment grade US corporate bonds.

Security selection is the main value-added source within this actively managed strategy. Over the past five years it has achieved a gross information ratio of 1.24. Finally, the Axa WF Global Factors Sustainable Equity fund is a diversified global equity strategy. It offers a way to deliver long-term capital growth with less volatility to investors by blending proprietary factors of high earnings quality and low volatility, together with ESG insights.

Verdict

A market crisis brings both danger and opportunity, and this month’s responses show how selectors weigh these potential outcomes in widely different ways. Some decided to stick to their plan, while others used the March market downturn to aggressively reconsider which way their portfolios were facing, and change course.

For the likes of Peter Kruyniers and Franca Pileri, the emphasis was on shoring up defensive elements. This led to the addition of stable, albeit low-returning, assets to counter unpredictable markets. Luca Bonifazi followed suit and sold down equities to add to that quintessential safe haven, gold.

Many selectors ditched equities – an asset class which experienced mass offloading in Q1 and into Q2. Almost every respondent discussed how they had reduced or realigned equity bets, with the likes of Sandro Vandoni explaining that the lingering fears of the Global Financial Crisis had forced him to make a move early in the latest market collapse.

However, not everyone was taking risk off the table. Oscar Blanco was among those moving into more exotic areas such as distressed debt, working on the logic that the extreme market conditions wouldn’t last forever and it was an ideal time to tap into opportunities at beaten-down costs.

Thomas Romig also discussed his alternative exposure, while Monika Netelenbos championed emerging markets and Will Shum looked at the potential around a strongly rebounding Chinese market. These three fund buyers show the wide variety of opportunities open to those seeking to remain active during six unprecedented months in the markets.

Chris Sloley, Editor

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