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All-weather ideas: 25 funds that selectors back to bend, not break

As global economic uncertainty builds, professional fund buyers reveal the strategies they are backing to ride out any potential storm.

All weather ideas

As global economic uncertainty builds, professional fund buyers reveal the strategies they are backing to ride out any potential storm. They also name the resilient fund managers on their buy lists and who’s up for the cut when markets take a turn for the worse.

These comments originally appeared in the October edition of Citywire Selector magazine.

All weather ideas

As global economic uncertainty builds, professional fund buyers reveal the strategies they are backing to ride out any potential storm. They also name the resilient fund managers on their buy lists and who’s up for the cut when markets take a turn for the worse.

These comments originally appeared in the October edition of Citywire Selector magazine.

Marco Vironda

AZ Fund Management, Luxembourg

This year has been dominated by risks stemming from a slowdown in growth and severe geopolitical uncertainty around US/China trade tensions. The sudden U-turn by all major central banks has soothed the markets, resulting in an environment where an equity bull run has been accompanied with falling interest rates and inflation. In this scenario, sectors characterised by low earnings volatility and a defensive stance have performed best and attracted most investor attention.

For several quarters nearly all of our equity allocation has been focused on these types of managers, and funds such as Lindsell Train Global Equity, Guardcap Global Equity, Threadneedle Global Focus, Wellington Global Quality Growth and JOHCM Global Opportunities are among our top picks.

If markets took a turn for the worse, those managers would be able to ride it out. However, if there was any sudden progress on trade talks or a resumption of pro-growth policies by countries like the US or Germany, there would probably be a massive re-rating of value and cyclical growth, where we currently have a big underweight.

Vincent Morel

Financière Arbevel, France

Given the current macroeconomic uncertainty and market volatility, we believe companies with above-average visibility on mid- to long-term earnings and free cash flow growth should outperform, provided their results meet expectations. Since the beginning of the year, we have increased our exposure to several global large-cap equity funds, such as Investec Global Franchise. The fund, managed by Clyde Rossouw, invests in quality companies, usually associated with global brands, that provide high and sustainable levels of return on invested capital.

We have also invested in the Ucits version of the Polen Global Growth fund. This strategy was launched in 2014 in the US, and November 2018 for European investors, using the same investment process as the successfully managed US equity strategy, which started in 1989. Fund managers Damon Ficklin and Jeff Mueller, run a concentrated portfolio of growth companies with strong balance sheets, sustainable competitive advantages and strong free cash flow generation.

On the other side, we have limited exposure to companies with low visibility on earnings growth, which therefore makes them vulnerable to a potential economic slowdown. We stay away from funds with large exposures to cyclical and value stocks, as we believe they would only outperform if economic growth accelerated or recovered, which is not our base scenario.

Tilo Marotz

Donner & Reuschel, Germany

Volatility is not necessarily a bad thing and can be used as a selective opportunity depending on your time horizon and risk tolerance. When you have to be invested in equities in a down market I would trust Comgest’s portfolios to weather the storm relatively well, as they have done in the past.

On the bond side it is hard to say, as there are few attractive strategies in the current environment. However, if you can tolerate some price volatility I would stay with Capitulum’s Sustainable Local Currency fund as it is well-diversified and holds high-quality bonds with high yields and low duration, making it a good addition in downswings.

On the alternative pro-risk side – in terms of mark-to-market swings – I would back and add Sergej Crasovschi’s Absolute Return Multi-Premium fund. He is able to profit from market volatility in this environment by locking in new discounted premia. The first thing we will cut when markets turn sour are our holdings in every kind of ETF.

Wynand van der Zandt

Beaumont Capital, Netherlands

Investor sentiment is always changing. Geopolitical developments, for example, can push markets sharply up or down but we won’t let our decisions be guided by these short-term shifts. We take an active, high-conviction investment approach and seek to add value by holding stocks long term, and avoid illiquid assets.

To guard against the expected market volatility we have defined and selected long-term investment themes. One of our preferences is infrastructure and we have bought into the Mercer Global Listed Infrastructure fund as we are confident about the strong fundamentals of its holdings.

Infrastructure projects tend to rely on long-term contracts, mostly lasting longer than the average financial market cycle, so this fund helps us gain a lower correlation to market volatility. Furthermore, the fund should be able to provide inflation protection and an attractive dividend yield.

Leticia Gago Martín

Santalucía Asset Management, Spain

When times get tough you need a fund with a flexible investment policy to ride out volatility over the years, which is led by an expert team with skin in the game. In this sense, some boutiques can be the perfect complement to blockbuster funds as they can differentiate themselves from competitors.

We favour a combination of strategies. On the defensive side we like the Aegon European ABS fund along with classic equity vehicles such as MainFirst Top European Ideas and Robeco BP US Premium Equities.

For credit allocation, we rely on the Evli Nordic Corporate Bond fund, with its focus on Finland and Sweden, or ICG Total Credit, which has the flexibility to invest in high yield bonds, senior secured loans or even CLOs in Europe. We also consider liquid alternatives for diversification and decorrelation purposes.

For instance, the Butler Credit Opportunities EUR Retail Pool fund, which specialises in European long/short credit, has not had a negative year since its launch in 2009. Meanwhile, the Man GLG Alpha Select strategy, which is a long/short UK equity market neutral approach, has a strong Sharpe ratio with consistent performance.

On the other hand, we tend to avoid funds with stop-loss levels as these may force managers to sell a position with strong fundamental figures, where the team has a strong conviction, just because of short-term market sentiment.

Flavio Incoronato

Banca del Sempione, Switzerland

Given the low cushion offered by government bond yields in a potential market storm, there seems no place to hide apart from real assets, and in particular gold.

Therefore, gold miners’ funds are our top pick in case of financial distress, as long as real rates remain low or negative and the trade war persists. In this asset class, we have found a valuable manager, named David Baker from Baker Steel, who has consistently outperformed during equity drawdowns.

Regardless of the market environment and economic cycle, there are at least two funds we feel comfortable with given the excellent skills of their managers: Man GLG Alpha Select, run by Nick Judge and Charlie Long, and Lazard Convertible Global, managed by Arnaud Brillois.

The first is a UK market neutral equity strategy which delivers performance purely from alpha. The second is a global convertible bond fund, which is our favourite asset class, given the natural convexity it offers; and among convertibles managers, Brillois is simply the best.

When markets look about to dive into the red, we tend to cut the most beta-sensitive strategies – usually funds exposed to more cyclical stocks or sectors such as semiconductors, autos and banks.

Munesh Melwani

Cross Capital, Spain

Given current markets, and the period in 2018 when all asset classes were closely correlated, our favourite investment style for volatile markets and geopolitical uncertainty is multi-asset global flexible allocation funds. Bonds are generally overvalued due to the extraordinary measures implemented by central banks over the last 10 years and the massive issuance from corporates in a zero or negative yields environment.

These conditions have driven markets to ridiculous credit spreads in many cases, which are likely to revert when the time comes. Therefore, we prefer equities as an asset class, but favour active management with a very selective approach, rotating to quality and value stocks.

We have invested in strategies such as M&G Dynamic Allocation and DWS Kaldemorgen in the flexible allocation area, and Morgan Stanley Global Brands and Heptagon Yacktman US Equities on the equity side.

When markets take a turn for the worse, we adjust our model portfolios to a more defensive stance, increasing our exposure to cash, decorrelated assets like commodities – gold basically – or some market neutral hedge funds.

Paul Gambles

MBMG Investment Advisory, Thailand

The current environment is increasingly suitable for zero-beta relative-value active strategies such as market neutral equity, that aim to generate stable returns in all market conditions by exploiting the difference between two stocks, two sectors or two regions, irrespective of their direction. This all depends on the manager’s skill, which is why we tend to favour established investors such as John Locke or Henderson in this space.

Strategies with either a fixed or preferably flexible element of beta, that are able to consistently deliver significant long-term alpha are also attractive in such an uncertain environment. A few notable hedge fund managers have been consistently able to achieve this, such as Steve Cohen’s roster of managers at Point 72 or Israel Englander’s multi-strategy team at Millennium.

We also favour protected equity strategies. The key here is to be able to deploy protection when it’s needed. Quant or black-box funds were formerly successful at this but their ability to do so has been at least partly arbitraged away.

Managers have tried to overcome this homogeneity premium in various ways but the strategy we find most compelling is the Sanlam Managed Risk fund’s use of machine learning or AI to provide protection against the risks of the MSCI All Countries World Equity index.

Konstantinos Tsourinakis

Alpha Asset Management, Greece

As market volatility picks up and risk-off sentiment prevails, we are adopting a more defensive stance. In the equity funds of funds space we prefer strategies that emphasise lower beta, high-quality stocks and have increased our position in the Invesco Pan European Structured fund. We also allocate a small portion of our assets to more flexible equity funds which incorporate hedging strategies, such as the Janus Henderson HF Pan European Alpha fund.

In our Alpha Cosmos Stars US fund of funds we are avoiding high-beta growth funds and are increasing our allocation to strategies such as the Amundi US Pioneer fund. We also invest in the iShares Select Dividend ETF. On the other hand, we are maintaining our allocation to Schroders US Small and Mid- Cap Opportunities fund, which has done exceptionally well in such periods, despite its investment focus.

Overall, any portfolio adjustment we make will aim to maintain diversity and reduce volatility, while offering some level of protection without altering the fund of funds’ focus, or resulting in high tracking error.

For our fixed income fund of funds we prefer flexible strategies with low volatility and low duration such as the Pimco GIS Euro Income Bond fund and the BNP Paribas Sustainable Bond Euro Short Term fund. We avoid funds with credit exposure at the long end of the curve.