A question of quality
While the high yield and EMD portion of Global Multi Strategy is nominally higher risk, the team is keeping to fundamentally sound credits.In emerging markets for example, they are focusing on companies with real assets such as oil and gas and mining. On the high yield side, oil and gas features again as do companies involved with packaging and telecommunications.
Moving to the higher-quality end of the fund, this focus is also evident, with Edmonds keeping to banks with the strongest credit profiles and recently reducing the subordinated and eurozone financials. In terms of Western sovereign exposure, the portfolio has 17% spread largely across US Treasuries and German bonds, primarily to off set credit risk elsewhere. “We do not see particular long-term value in these areas and are aware yields are already very low but they retain diversification benefits and help reduce volatility,” adds Edmonds. “If eurozone contagion spreads or economic data deteriorates markedly, it is not hard to see US Treasury yields push below 1.50% and German government bond yields head down to 1.20%.”
Duration
A further defensive position is the 10% in mortgage debt, which Edmonds says is a high-quality liquid asset that should continue to benefit from further quantitative easing, as the US government works to keep rates down. “We are constructive on markets longer term but expect volatility later this year so have reduced credit risk and also added some duration at the high-quality end,” adds Edmonds. “In the short term, we are not worried about higher bond yields per se but have the ability to reduce interest rate risk when we think yields are about to start rising.”
Duration is currently five years – rising slightly in recent weeks through adding Treasuries – diversified fairly evenly across government, investment grade, high-yield and EMD holdings. Edmonds says the typical duration range for the fund is around three to seven years and while he can take the level to zero, Global Multi Strategy cannot go negative like some peers. “Our view is that going short government debt against our high yield bias is dangerous,” he adds. “High yield is more correlated with equities so if markets moved against us, we would potentially be short government debt as it rallied and long high yield as it sold off .”
Currency is the final source of potential returns, although with a US and hard currency- denominated EM skew, most of this bet (72%) is towards US dollars.
East vs West
Elsewhere, the portfolio also has just less than 7% in the Japanese yen as a diversifier heading into expected volatility, with the currency tending to perform well in times of stress.
A further 7% is in the euro although Edmonds has hedged against any downside risk – protecting against the currency falling through 1.22 against the dollar – using put options in recent months. From a broad macro perspective, Edmonds says Western is clearly more bullish on East than West but it is vital to understand emerging markets – despite their many strengths – still depend on the global risk environment. “Our central case is that global recovery will be sub par but remains ongoing – we initially expected the US to grow 2.5-3% this year but have revised this down to 2-2.5%,” he adds. “We are aware of the recent slowdown in indicators but US banks are in good shape, the housing market seems to have stabilised and energy prices have also come off quite sharply recently, which should all help to support the economy.”
Remaining on the positive side, he expects a soft landing in China and highlights rate cuts across emerging markets to stimulate growth. “Global economies are interlinked so if we have a deeper recession than expected in Europe or the US slows, that will affect growth in emerging markets,” adds Edmonds. “Europe is clearly the major risk at present, with so much uncertainly and fi scal austerity measures causing recessions across the periphery.
Overall, we believe there will be a mild recession in Europe but the region will avoid a systematic banking crisis.” As for inflation, he says pressures are benign in the short term and likely to remain so in the face on ongoing fiscal tightening, with governments forced to keep policy as stimulative as possible.
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