Focus on multi-asset – Tweaking the exposure

The ability of multi-asset strategies to reduce the risk of relying on just one class is well-documented, but AllianceBenstein’s Jim Ross says another advantage is the ability to finesse exposures.

Ross (pictured) is a senior portfolio manager, and runs part of AllianceBernstein’s $25bn of emerging markets assets under management. His particular focus is EMs, and the firm’s EM multi-asset vehicle, the €52m Emerging Markets Multi-Asset Portfolio.

“If you want to say something through your multi-asset portfolio, there are many ways of doing that, and picking the right way to do it is important,” he says.

He notes a number of pitfalls cannot be avoided by an investor in single asset EM strategies – either passive or benchmark-hugging active.

One, in the case of bonds, is an unduly high weighting to Venuzuelan debt. This country enjoys a current weighting of 8.8% in popular EMD bond benchmarks, due to Latin America being heavily involved in debt issuance as the EMD asset class grew in past years.

“If you are an EM bond investor you will almost certainly end up with exposure to Venuzuela and if you are a bond manager you will own some.”

Ross’s Venuzuelan debt exposure is just 3.4% of his EMD holdings, and he says a higher exposure is undesirable, due to the nature of that country’s political powerbrokers, and inflation running at nearly 20%.

Ross has used his ability to access credit default swaps, to hedge out the country exposure on his Venezuelan debt.

“A multi-asset fund does not need Venezuelan risk, it can take its risk in equities, for example. You can avoid owning the debt you do not want.”

In a similar vein, but for EM equities, he adds: “Multi-asset managers can avoid owning relatively dull companies, or ones you do not really like, just because they are big.

“In the EM equities arena you do not need risk diversifiers in the way you normally would, because you have bonds and T-bills that can give you a lower risk exposure.”

Ross says he can also make use of currency instruments to reduce country-specific risks.

He finds large caps such as Brazilian iron ore giant Vale or oil mega-cap Petrobras interesting as equity investments, but
expresses concern Brazil’s economy more general has “slowed rapidly, and it is being run in a mercantile fashion, which does not benefit investors much.”

“We have decent exposure to Brazil, indeed it is one of the bigger exposures in our equities portfolio, but we have a short view on the [real].”

In Russia he also likes some oil stocks, but is less enthusiastic about the overdependence of the overall economy on the energy sector – so he takes a short view on the rouble.

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