Fund managers are already encouraging 'risk-on' attitudes after markets plunged in August, but allocators argue 'not so fast'.
Fleet of foot
In mid-August, Pioneer’s Dirk Wiedmann, head of investments and CIO at €12bn investor Rothschild Wealth Management, painted two future scenarios for the system – ‘return to stability’ or ‘an evaporation of trust’ – and said: “We are prepared to alter our positioning very dramatically as and when we deem this to be in the best interests of our clients.”
O’Toole says: “People’s time horizons are shortening, but there are still notions it is somehow inappropriate’ to invest over anything other than the long term. But I think people are buying a bit more flexibility, and they need to, to protect their clients. To expose clients to opportunities, investors need to be a bit more reactive and flexible in terms of time horizons.”
Despite heightened volatility, Alexandre Pini, portfolio manager in the investment fund department of Banque Privée Edmond de Rothschild, says investors still need to look to equities for the long term. He highlights equity event-driven strategies as a profitable and more focused way to access them, than long-only stock picking.
“Event-driven is delivering much better returns, and is a less risky way to get exposure to capital markets, at a time when bond yields are at historic lows, and risk in fixed income markets is huge in particular as ‘risk-free assets’ are no longer so ‘risk-free’.”
Pini points to possible M&A, from which event-driven funds can profit. “A handful of companies are flooded with cash sitting on balance sheets and depressing ROE, investors are unhappy with this and the companies cannot grow their top line. They can buy back their own stock or buy competitors, and PEs are even lower than a few weeks ago. Borrowing is quite easy, so it is a credible strategy, which can get involved in all these situations.”
Pini also notes that volatility is not exactly the same as risk. “Investors have to be prepared to accept more volatility today than they did five or seven years ago,
paradoxically, to reduce risk. That is not easy.
“Today you can buy German bunds, which are not very volatile, but arguably bear a lot of risk as well. It is not clear that owning shares today is much more risky, only more volatile. Equities have volatility in the short term, but all fixed income markets from sovereigns to credit to structured credit face big risks to capital going forward, such as interest rate or potentially inflation risk just to mention two of them.”
Pini says today’s climate looks unusually volatile, but it might seem so only compared to a particularly low volatility period between 2003 and the sub-prime [crisis] in 2008. Now we are going back to the norm. “If you do not accept some volatility, you will not make money.”