Austria Forum takes a waltz through the asset classes

Delegates at InvestmentEurope’s recent Austrian Forum were taken on an A to Z tour of the asset classes.

The range of strategies presented to delegates at InvestmentEurope’s Austrian Fund Selector Forum could hardly have been broader, ranging from computer-driven funds to convertibles and Asian consumption.

Steeve Brument (pictured), head of systematic funds at Dexia Asset Management, said managed futures funds could still make profits in various markets even if profitable trends in government bond prices – “the easiest trade and the purest trends we have had for the last 25 years” – disappear.

But, he added it was important computer-based strategies extend beyond mere trend following, to counter-trend and mean reversion, as Dexia’s do.

Applying various models is especially pertinent in ‘risk on, risk off’ markets, which can send trend-followers false signals, Brument said.

Six years ago, Dexia AM instituted a counter-trend model to help offset losses in such conditions, and also to handle risk-on risk-off markets.

“You want models that work in a low interest rate environment and you want diversification.”

Dexia’s counter-trend models will work best over one to five days, whereas trend following models are implemented over anything from one month to one year. In trending markets, logically, trend-followers outperform. In choppy markets, mean reversion models perform, while in trending and choppy markets both styles can benefit.

Brument emphasised the importance of using a range of markets. Dexia’s strategies deploy in 50 financial markets and seven major asset groups, from agricultural commodities to interest rates, energy and FX.

“We could trade in more, but at some point diversification does not bring anything more to the portfolio except liquidity, and we are not desperately seeking that at our size.”

Nathalia Barazal, head of convertible bonds management at Lombard Odier Investment Managers, showcased LOIM’s convertible bond expertise. The bond portion of convertibles means they behave according to how credit and rates markets are moving, but also to an extent reflect equity markets too, due to the embedded option to convert to shares.

60% of market upside

With these characteristics, Barazal said, her team aims to capture 60% of market upside, and avoid just as much of any falls. In 2008, an annus horribilis for convertibles, LOIM’s flagship convertible strategy lost 18.7% as share markets fell 41%. Between its launch in December 2002 and September 2012, it made 49.2% compared to 27.7% from shares, on roughly half equities’ volatility.

Barazal said: “Overall convertibles have a fantastic asymmetric profile. Having 10% or 20% in convertible bonds is where the best risk/reward profile lies for many allocators.” Convertibles also offer significantly lower five-year rolling annualised volatility than equities – 8% versus 21%.

Barazal conceded convertibles fell “far further than expected” in 2008, by 26% according to some benchmarks, but attributed this to rapid deleveraging among some holders whose representation in the market has since declined from at least 70% of volume, to 40%.

Uwe Röhrig, senior equity strategist, executive director at UBS Global Asset Management, described the opportunity to profit from growing consumption in Asia.

A mixture of a young population, increasing wealth and urbanisation, willingness to use debt and a low penetration of consumer goods suggested the consumption trend, already well underway in Asia, would continue, he said.

Asia ex Japan’s middle class is forecast to grow from 19% (570 million) to 31% (1 billion) of the population between 2010 and 2015.

Röhrig added, one in every four billionaires are now Asian, up from one in ten in 2005, and Greater China consumers are expected to account for 44% of global luxury sales by 2020.

In India a national rural employment guarantee scheme, and higher minimum prices for key soft commodities is driving rural income. Similar moves are afoot in Thailand.

Consumption should also increase in China – “whether its economy grows at 7.5% or 9%” – given national increases in the minimum wage.

“We see the opportunities for the next 10 years, and that is how we build our portfolio,” Röhrig said.

He pointed to three themes informing portfolio construction.

Basic consumer staples lie behind about 35% of the fund, lending a defensive characteristic. Consumer discretionary such as retail, cosmetics and some luxury, underlies about 60%, while healthcare comprises the rest of the fund.

The UBS (Lux) Asian Consumption strategy’s 30 to 80 stocks can include Asian companies, whether active mainly domestically or globally, and those outside Asia with ‘substantial business exposure’ to the region.


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