Frankfurt Absolute Return Focus highlights strategies to face low yield challenge

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Approximately 25 delegates participated at Fund Selector Absolute Return Focus Frankfurt, the first Open Door Media event held in Germany’s finance capital.

Key theme of the half-day event were absolute return strategies in order to respond to the current low-yield environment.

Reto Baumgartner, senior portfolio manager at Fisch Asset Management presented the firm’s Manta Plus strategy, which applies convertible bonds in order to offer asymmetrical positions in response to market stress.

“Our pensions are invested in this fund, which is why our interests are identical to those of investors at all times” Baumgartner highlighted. While his fund has a 19% equity exposure, access is offered largely through convertible bonds.

Meanwhile, Paul Nicholson fund manager at Vontobel highlighted the potential impact of a persistent low interest environment on the fixed income sector.  “With even the Chinese government engaging in quantitative easing, current spread levels are beyond absurd” he argued.

Referring to 2013, Nicholson stressed: “We need to be prepared for situations when historical correlations break down and bonds and equities decline at the same time, which is why we need absolute return strategies.”

Alex Johnson, head of Absolute Return at Fischer Francis Tress & Watts (FFTW), a BNP Paribas partner, challenged the commonly held notion that fixed income is held as a diversifier to equity investments. He highlighted that historically, fixed income only outperformed when equity markets declined dramatically and that it was therefore incorrect to understand it as either a diversifier or low-risk investment. Instead, he highlighted the potential of an unconstrained approach centered on correlation analysis.

“For us it is crucial to grasp how soon we have a correlation problem within respective asset classes. In that respect, 2011 was very instructive and we successfully managed to apply the kessons in 2013” Johnson argued.

For Investec, emerging market debt offered an opportunity to apply total return strateiges to the fixed income sector, as Antoon de Klerk, portfolio manager of the firms Global Emerging Market Debt team argued.

According to de Klerk, the fact that absolute return strategies are unconstrained from benchmarks enables them to offer more attractive risk return dynamics than benchmarks. In contrast to the JP Morgan Global Emerging Market Bond Index (GBI-EM), his fund offers relatively high currency exposure to Mexico, India and China whilst being underweight on Polish, Turkish and Brazilian currencies.

Similarly, Andrew Stanners, investment manager Emerging Market Debt at Aberdeen highlighted that EMD valuations are currently attractive to developed markets. “Emerging market liabilities have improved significantly over the past ten years and while low currencies have initially represented a challenge for fixed income investors, they have improved current account levels, therefore being a positive development in the long run” he argued.

 

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