At the recent Fund Selector Asia Forum held in Hong Kong, fund managers offered their insights into how they are using numerous asset classes, often making short-term tactical allocations, to maximize returns amid the current low yield scenario.
This multi-asset approach, where opportunities are sought across equities, bonds, and currencies, globally, was cited by a number of managers as a preferred investment strategy.
Flexible bond investing
Citing inherent risk across standalone assets such as government, investment grade, and/or high yield bonds, Anthony Doyle, investment director at M&G Investments advocated the concept of flexible bond investing with active duration management, taking into account the macro-economic and credit cycle.
“There is an inherent risk rising in global government bond portfolios. High yield (bond) is not a bad place to be in rising rates, because global growth is rising,” he said.
Doyle, who manages two flexible mandate funds with assets worth $25bn and $3bn, is currently keeping an eye on the duration of the bonds within his portfolios due to the steepness of the yield curve.
“If I focus on that one to three year corporate market, I can still make good returns rather than long duration,” said Doyle. “BBB rated assets are the sweet spot in investment grade. I can go right across the credit spectrum and have allocation to equities.”
He, along with some other asset manager speakers at the event, are bullish on the US dollar due to its reviving economy and many feel the world’s largest economy will end the quantitative easing programme, that it initiated to inject liquidity and revive the economy, in 2014.
“In a world of low yield, I can use currencies to generate performance. We are short on Brazil, South Africa, sterling. US dollar is going to arrive next year and that will have big implications on emerging markets which have issued hard currency debt,” Doyle said.
Doyle is bullish on US dollar as he feels the US housing market is in recovery mode in terms of prices, inventory, or supply.
“The Fed may be forced to start tapering sooner or later. Before 2015-end, we might see a rate hike. So that has implications, the one which we saw in emerging markets,” Doyle said.
Ariel Bezalel, a member of Jupiter’s fixed interest team and manager of the €719m Jupiter Dynamic Bond Fund, a Luxembourg domiciled Sicav, follows an unconstrained investment approach.
With a view that interest rates are slowly moving up, Bezalel has boosted exposure to floating rate notes, which account for 30% of the portfolio, and has been shorting US government bonds for the past 18 months.
He said he is “most bullish” on European high yield credit, as he feel it is in a “sweet spot” compared to US high yield. He has long positions on Australian bonds, which accounts for 10% of the portfolio.
“We feel there will be more downside pressure on government bonds in Australia. There is a bet on a China slowdown and China is demanding less commodities from Australia.”
Bezalel is also short US treasuries (2%-3% weighting in the fund) and 10-year French sovereigns due to concerns over its economy, but is long on US currency.
“We expect the economy to revive in 2014, US dollar should outperform euro.”
Absolute Return Investing
Mark Foster, investment director at Standard Life Investments, encouraged absolute return investment strategies.
“We very much believe in absolute return, multi-asset products. If you are concerned about portfolio volatility, then what you should actually do is to invest in a multi-asset portfolio,” Foster said.
Absolute return investing produces a lower risk and more consistent performance and can protect in any environment.
He cited one example from many of his investment strategies that gives “maximum diversification” and “the magic alpha.”
“We are looking for a broad range of investment opportunities. We are long on US dollar. Right now if you look with a three-year view, US dollar looks weak due to QE and fiscal cliff concerns. Euro is very strong now and we feel it is likely to weaken. We prefer US large cap versus small caps.”
He feels UK equity, Russian equity, and high yield credit are all heavily correlated to global equities, while valuations look expensive for Mexican 10-year, UK corporate bonds, and global inflation-linked bonds. So, he believes this strategy is not favoured as it offers the “least diversification”.
Asian high yield
Tim Jagger, senior vice-president and portfolio manager, fixed income, Asia, Aviva Investors believes Asian high yield is a good diversifying asset class within fixed income portfolio given historically low correlation with market interest rates.
Asian high yield is attractively valued relative to US high yield and also the average default rates are lower than global high yield.
Jagger highlighted data from rating agency Moody’s which showed recovery rates in Asia are comparable to global levels and added that often covenant protection in Asia is often superior.
Moody’s reduced its one year default rate expectation for Asian high yield from 5% to 2% in March 2013, bringing it below both the US and Europe. Some fund managers pointed to Hong Kong, China, and Singapore as jurisdictions where default rates can be particularly low.
Equity strategies
On dividend yield investing, Yu Zhang, portfolio manager at Matthews Asia, said dividend yields of companies in Asia, though lower than European companies, are still higher than their US counterparts.
“One should consider how sustainable high yield dividends of European companies are in comparison to Asian companies. Asia represents a well attractive place for dividend investing strategy,” said Zhang.
Citing the big divergence across Asian markets, the fund manager added that Singapore and Taiwan offer significant amount of opportunity for high dividend yield companies, while he also sees “signs of change coming in Japan”.
“Absolute dividend yield is still pretty low, but improvement is very encouraging,” he said.
Amanda McCluskey, senior investment manager at First State Stewart, a part of, First State Investments, offered interesting insights on identifying companies based on sustainable development.
“We don’t want to be influenced by valuation. We identify good quality of companies in terms of risks in a slightly different way – sustainable development. We look to and focus on sustainability risks and opportunities in our funds,” she said, explaining the need to assess environmental, social, and governance issues.
Market insights
Consensus held that the fate of the QE program along with a feared economic slowdown in China are the scenarios to watch out for, but that some comfort can be taken from the improving outlook in the European region and US economy and in turn the US dollar.
“Though there is a near-term improving outlook on the European market, what is interesting is over the long-term, equities managers are tilting away from Europe and towards the US and China,” said Danny Howell, head of wealth management Asia at Towers Watson, citing a survey result of over 300 investment professionals.
