Volatility has returned to the markets and investors are realizing that, in this environment of uncertainty, there is a possibility of losing money in assets traditionally regarded as safe, such as fixed income. In fact, some debt and equity markets seem to be overvalued and doubts about their behavior are becoming more pressing. “Investors want more stable returns but do not want to experience losses or take risk, and in this regard, absolute return solutions are a good choice. These strategies really do have a place in portfolios,” says Adam Mac Nulty, Client Portfolio Manager for Multi-Asset Solutions at Pioneer Investments, during an interview with Funds Society.
The expert, who recently participated in the Pioneer Forum in Miami, reveals the virtues of a range of the management company’s multi-asset solutions, encompassing multi-asset products with direct investment, even in income mode, funds of funds, tailored solutions, and absolute return multi-asset strategies. The latter, which they have been managing since 2004, have aroused great appetite amongst investors, especially during the last 18 months, due to market conditions.
But not just any absolute return strategy will do. Mac Nulty explains that diversification is the key: being aware of what is in the portfolio; giving beta an increasingly less important role; and placing greater emphasis on alpha generation. “We should not depend on beta because perceptions often do not correspond to reality,” he says.
Alpha generation can be arrived at, for example, by investing in long-short, or relative value strategies: “In traditional strategies alpha is usually only generated on the long side, but it’s different with portfolios that are less restrictive. It’s important to increase the range of investment opportunities and ideas; adopt relative value positions; invest in multiple uncorrelated strategies thus ensuring robust diversification,” he says. All with the intention of reducing the volatility of fixed income and equity markets.
And he admits that the fact of having an absolute return perspective is easier with a multi-asset portfolio than with a single asset: “The fact of not being limited to an asset offers more opportunities.”
In their strategies, they invest in liquid assets, including fixed income, equities, real estate, convertible bonds, derivative strategies, commodities…
Managing Absolute Return Portfolios since 2004
Since they started managing absolute return portfolios in 2004, the markets have changed greatly. “Many extreme events have happened, such as the 2008 crisis and periods of volatility, from which we have learned and which have helped us to improve the management of our portfolios,” explains Mac Nulty.
For example, in recent years they have introduced more diversification in portfolios (previously they had around 45 strategies, and now there’s around one hundred); more relative value strategies; they are constantly seeking to combine multiple, low correlated strategies into the portfolio; and they have introduced several layers of risk management to help protect the portfolio from the permanent impairment of capital including hedges against possible extreme events in the form of put options, or positions in Gold as a hedge to their macro base case. “We learned a lot from past experiences. It’s also very important to stress test the portfolios regularly to discover how they would behave under different scenarios. Because the next crisis will be different, and we want to be prepared,” he says.
Proof of this is the behavior of the portfolio during last August. After the rally in the first quarter of the year, the managers decided to adopt a more cautious stance. “We believed that the market was too complacent and that valuations were not attractive.” Therefore, they reduced risk, by cutting their equity and FX exposures, and reducing duration from 4 years to 2 years. Their positioning paid off during the summer−especially in the slumps in August− as the team benefited from the low risk of their portfolio.
“We’re not market timers but we’re very good at managing risk. In summer we had very little market exposure, and moderate levels of duration when the sell-off occurred; we were well positioned and the portfolio lost only a small bit of ground,” he explains. After the falls, they assumed a bit more risk in portfolios, although they are still at low levels, and believe that, as yet, there are still no good market entry points. “We believe that volatility is making its way back, which will increase the correlation between asset classes,” advises the expert. “But we are always on the lookout for interesting opportunities and would look to add risk exposure should we experience any further sell offs”.
The Strategies
Among the company’s multi-asset absolute return strategies, the most noteworthy are two funds which are both managed flexibly and domiciled in Luxembourg: the first, “Multi-Strategy”, is a multi-strategy, absolute return fund launched in 2008, flexible and of long-biased duration, it targets a return above liquidity of between 3.5% and 4.5%; and the second, “Multi-Strategy Growth”, is a somewhat more aggressive version which aims to beat the cash at between 5% and 6%. “We intend to provide stable returns by focusing on risk, without relying on the beta, and with relative value strategies playing a key role,” he explains.
In general, Pioneer’s multi-asset strategies (both funds of funds and direct investment or absolute return focused multi-assets) are based on four pillars of management. The first is the macro, in which managers obtain a main scenario which leads them to favor some assets over others and some regions over others (for example, it can lead them to be positive with Europe or the US dollar but avoid investing in emerging markets, except for in some of them, such as India). The second pillar is macro hedging: a group of hedging specialists, critical of the risk taken in macro strategy, is dedicated to analyzing those risks, their probability, and their potential impact on the portfolios. For example, now they consider that there are risks of a hard landing in China, a bubble in their markets, the possibility that the rate hikes in the US occur too quickly, or too slowly, that there is deflation in Europe … and they analyze the impact on the portfolios. “If they believe that the odds are high, they use hedges,” explains the expert, and such hedgingcan be easily implemented, with gold, for example, or more complex, with derivatives and swaps.
The third pillar is based on relative value satellite strategies, favoring an asset, country, sector, or currency over others … For example, in emerging markets they favor countries that have made reforms, such as India, over those which are debt ridden, and are committed to long positions in this Asian country as opposed to short positions in currencies of countries like Hungary or Brazil. The idea is that these strategies are not correlated with each other or with the macro vision. And the fourth pillar is that of selection, which tries not to replicate the macro vision, and which is a key aspect in funds of funds strategies, but not as much for those of absolute return. In fact, these pillars have different weights depending on whether the multi-asset portfolios are funds of funds, direct investments, or absolute return.
Currently, the management company has 2 billion Euros in multi-asset absolute return strategies, but feels very comfortable, however, and believes they can grow further. “We could manage 20 billion,” says the expert.
