Cantara: It goes back to this point of understanding how managers are organised and what the culture of that investment platform really is and again, at MFS, we manage assets across fixed income, we have quantitative strategies as well as equity strategies and a big part of the – I’ll say cultural element, is sharing that information. So, I would say to your point, that our fixed income team is much more adept at analysing the political nature; our emerging market debt team is better than our equity analysts are. From an equity standpoint, we have historically tried to not focus on those because they are generally short term and more cyclical in nature, we’d much rather understand what are the key drivers within the industry for the business, the cash flows and focus there. Everybody talks about culture and having a global research platform and the integration of that but that’s one of those things on the checklist that really has to be understood by asset owners and anybody hiring managers: how does that really manifest itself on a day to day basis? How does that come through and how do you get to really exploit some of that information sharing? And to us, that’s a key part of any global research platform.
Pendock: You can see very much now that asset owners are looking at asset classes to see whether they have the same characteristics of expected return against a certain risk budget etc. So, as the asset owners start to break down the silos, then surely this will carry on more and more but a lot of the large fund management houses are very much in a siloed mentality still. I’m very interested to see how some fund managers will have the credit guys and the equity guys discussing it, going to the same management meetings, where before they’d sit on different floors, maybe in different countries.
Cantara: You’ll see representatives from the fixed income team, the equity team, the quantitative team, thinking about that, trying to bring all of those elements together. Ultimately on the equity side it still is the analyst who is putting the rating and is responsible for that, but there’s lots of inputs that go in to that and that’s something that we’ve been doing for a number of years.
Greening: It’s also, in part, trying to escape from the crowd in that assets are incredibly overvalued in traditional markets and therefore if you want to reduce the risk of something very nasty happening to that value then you need to think about alternatives that are perhaps not so popular. There is political risk in countries like Nigeria for example, but nevertheless if you look at things like wealth generation, population, then for most of that country it’s a different story. Having some diversification into those markets with a fund manager who is knowledgeable and well connected and is able to assess relative risks, both political and corporate, of the companies that one might invest in is the critical thing, but it spreads risk.
Cantara: Global equities historically have had very low direct investment in emerging markets somewhere in the order of 3% to 4%, but if you look at the revenues that are coming from the emerging market economies in an overall global equity portfolio, it jumps to about 25%/27% of the revenues.
What investment strategies are available to manage volatility?
Lindenberg: A key trend that we’ve seen is looking to invest in some alternative risk premia in many cases with – or ideally with a low correlation to your traditional market betas. Active management is one way to get that but there are some new products and solutions available on the market which enable investors to get that in a more systematic way, often at lower cost than active management. There are many different ways of managing risk and measuring it but we would look for some evidence that the manager has a very clear and robust structure in place for managing volatility; whether that be a volatility target, option protection, stop losses and so on. We would look for evidence that multiple layers of risk management are in place rather than focusing on a single metric.
Greening: There are so many different sources of it that you have to pick the ones that you feel most confident in being able to manage that and being able to take that risk.
Arthur: It comes back to this understanding of the product you’re buying or the manager you’re invested in. It’s the same within fixed interest; are you pushing them to provide an absolute return that requires you to take a very new and consistently high level of risk? Or are you giving them, within the mandate, the ability to say, “We believe asset prices are too high, we’re going to go defensive and this may mean that we structurally underperform the benchmark you’ve given us for three, four, five quarters, because we believe that” and as long as you feed that back to the client and have the discussion and they understand and they buy in to it, that should be okay. It’s important to give the asset manager that level of responsibility, providing they can communicate and you can build up the trust.
Cantara: To go back to this concept of winning by not losing, there is a place within almost any portfolio where the diversification benefits of an actively managed low-vol strategy can really add value over a full market cycle. Not trying to predict the near term, but certainly we are in a rising rate environment that’s not an environment that’s conducive or has been conducive to outperformance from low-vol strategies, but for the way we’ve been talking about inflation, we’re expecting rates to rise in the US. A lot of signs are pointing to a later cycle, so when you really see the other side of that, that’s when low volatility strategies really shine.
