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.
Information is power
Hoppe receives full attribution analysis on target funds monthly, and position data to aggregate in FTMAS risk system. “It is important to keep an eye on what is in the fund, and if it really reflects our views, and that a manager sticks to a clear and transparent strategy, and not do things they have not talked about before.”
Managers who under- and outperform unexpectedly will be contacted by the manager research team, to know “which risk a manager took to generate outperformance, for example”.
The multi-asset unit team members who recommend managers also have experience in their chosen asset class, and understand macro factors influencing it. They are therefore well placed to ask appropriate questions of managers.
Hoppe says his team tries to offer clients “a core portfolio which will take away the responsibility for the clients to have to reallocate or adjust a portfolio themselves. We are constantly doing the adjustment ourselves, as appropriate.”
The team can use active and passive funds, and derivatives in portfolio construction. Currently about 95% of the $30bn is with active managers.
Hoppe says ETFs are helpful to implement tactical, shorter-term views quickly. The team used them for a two week period over summer when it increased then trimmed equity exposure.
It also used ETFs for US and euro government debt, because market efficiency makes it, only in this asset class, difficult for active managers to outperform after fees. Hoppe adds his unit’s products have avoided peripheral eurozone sovereigns, even in global bond funds.
The team may use derivatives to limit losses so to stay invested in target funds for the longer term, and not have to sell and buy again quickly. Such trading may not, in any case, be welcomed by the fund managers. Derivatives can also lower overall volatility.
Hoppe has largely avoided hedge funds: “From a theoretical perspective a long/short manager should do very well in the current environment. But the reality looks quite different. Performance of hedge funds this year has been quite disappointing.” His products are, however, invested in a diversified alternative strategy that applies trend-following approach. It is for protective diversification as it has a low and sometimes negative correlation to equity markets.
Hoppe’s team also opens separate mandates, white labelled or co-branded, for clients.
“Our clients today are focused on risk and volatility of a particular strategy. Thinking about a benchmark has disappeared. In Europe we currently manage three strategies with a risk target, and believe there will be continued demand for such strategies as long as market volatility is with us.”