Having an element of top-down analysis, a ‘big picture' view of the global economy and of how asset classes react in it, will be crucial to investing funds successfully over the coming years.
Opportunity in crises
Hoppe draws parallels with the depths of the first financial crisis. “2008/2009 was also a period of great opportunity making it important to position one’s portfolio to take advantage of improving conditions after the crisis. Investor sentiment in 2009 pessimistic, and everyone thought growth would stop. But indicators we were observing were saying valuations were very attractive, so in January 2009 we started to increase risk.”
First in high yield managers, because the asset class was quite correlated to equities, but offered a better risk/return profile. “The underlying companies were still very solid, that is a reason why we liked, and still like, high yield.”
By March 2009, when the markets quickly suddenly, Hoppe’s team already had about 50% in equities in their balanced portfolios, then 65% by summer. “In hindsight we could have wanted more EMs.”
Hoppe says investors now are “obsessed with risk, but we all know what the risk is – it is the eurozone’s debt problem. We are trying to look beyond all that noise already there, and we are seeing a lot of leading indicators improving, especially in the US but also in EMs and even some in Europe. Increasing risk has been [added] by buying good quality corporate debt, good high yield and EMD, and credit that suffered during the risk off period.
“Our approach is not about making absolute bets, it is about making relative bets, tilting the portfolio towards one or another scenario, but not tilting it absolutely, because if it went wrong the portfolio would be hit very badly.”
That said, an important theme in the multi-asset team’s portfolios at the moment is defensiveness. Cash is at a relatively high level and money market funds are examined carefully for levels of ABS securities and other cash-equivalents.
Gold comprises 3% of the funds. Hoppe does not rule out increasing this. “The opportunity cost of holding gold assets has been very low, given very low yields on government bonds, and the perceived safe haven status of the asset class.”
Bunds and Treasuries comprise about 15%, “but are not held for the yield – they they offer some level of security, but are not sustainable positions over the long term. Currently, however, they are the asset class with lower volatility and low correlation to equities.”
Hoppe faces the allocator’s primary problem with ‘risk-free’ assets currently – low risk entails returns too low over the longer term.
The multi-asset team naturally also concentrates on finding the best fund managers to reflect their top-down views.
“Even if, over 10 to 15 years, 75% of influence on stocks markets behavior is driven by macro factors, it remains important to get stock picking right as well – for example, a large overweight in banks would have fared very badly this year.”