By Asbjorn Trolle Hansen
Making major asset allocation decisions based on macro calls of well analysed events have repeatedly been proven to be a difficult investment strategy.
Macro event risk is always evident in markets. Investors have faced numerous such matters in recent times – for example unconventional monetary policy actions, currency interventions, bailouts and elections. Although these moments can have significant near-term impacts on markets, it is an extremely risky strategy to try and position a portfolio in anticipation of any single scenario.
This was clearly on show during the recent UK referendum. Many investors witnessed sharp downside after incorrectly positioning portfolios for a ‘Remain’ vote, which had been widely anticipated by investors.
Many multi-asset strategies, which are supposed to offer sufficient diversification characteristics to withstand these macro events, also suffered strong Brexit-inspired downside. This was largely due to the reliance of many strategies in making the correct macro call, which was compounded by the absence of true diversification.
Unfortunately, Brexit was not an isolated incident. The last 18 months have been rife with volatility and event risk. This was clearly on show during the summer of 2015 – which was highlighted by the fears surrounding Greece and the China hard landing scare. The severe risk-aversion in markets, due to additional concerns surrounding China, in January this year was another challenging period for investors. Once again, many participants within the DGF universe could not provide the much-needed and often-promised true diversification for capital protection.
Similar to Brexit, there are a number of other risks on the horizon. The Italian referendum on constitutional change comes in October, while the largest event risk on the horizon – the US presidential election – follows shortly after. Many investors will not be able to avoid the temptation to position in favour of an expected result. However, as was witnessed with the UK referendum, this is a dangerous game to play – as polls, and bookmakers alike, can often be wrong. In our opinion, investors simply do not need to take this risk. Rather, it seems that on average, making those directional calls and positioning portfolios based on no informational advantage relative to “all the others” in the long run is leading nowhere.
We try to do things differently at Nordea. Our Multi Assets Team decided a decade ago to shift our investment focus away from asset class investing – such as top down or directional/beta investments. Our process is to focus on return drivers, or risk premia.
One of the primary reasons for this important distinction is that most asset classes can include several risk premia exhibiting significantly different characteristics over time, and by separating these we are able to run a much more robust correlation analysis. This has allowed our Nordea 1 – GBP Diversified Return Fund to navigate through periods of severe market dislocation – as we witnessed during the period following the unexpected Brexit vote.
In our opinion, investors look to DGFs for consistent returns through a cycle, as well as the ability to protect precious downside. Therefore, questions must be asked of those so-called DGFs that rely on repeatedly making correct macro calls and positioning portfolios accordingly.
Volatility and event risk have always been and will continue to be a feature of investment markets. We believe the role of multi-asset managers is to deliver a portfolio providing true diversification. This is not simply about piling into numerous asset classes, but rather the identification of a select number truly uncorrelated positions able to deliver for investors through most market environments.
Asbjorn Trolle Hansen is manager of the Nordea 1 – GBP Diversified Return fund