In easier markets, some managers got used to bending mandates and providing less than complete explanations to investors. Manuela Thies at Allianz Global Investors talks about restoring high reporting standards
She can invest in ETFs and derivatives. The team may use ETFs with the goal of more easily generating returns – where active managers might not produce alpha after fees, for example – or use derivatives to implement tactical allocation decisions or to limit losses.
“We’ve used other tools for quite a while,” she says. “Although active fund managers are still the major part of our portfolios, we may also add passive instruments such as derivatives or ETFs.
“If we find opportunities to get overweight in specific sectors or countries, we use active country and sector funds as well as ETFs or derivatives. Or we may have a portfolio with a ‘global equity’ portion and be 100% invested in managers because we are convinced of all of them. The markets may still fall for macro reasons. That is when we could use derivatives to short the markets.”
In 2010, the team determined at the start of the year that this would be good for stockpickers, so trimmed passive funds in equities as well as fixed income. “
There were good opportunities for managers on the fixed income side, even though it could be more difficult for them to deliver attractive performance after costs,” Thies says.
Strong inflows into equity ETFs can push valuations of some companies beyond what fundamentals justify, but that provides opportunities for quality managers.
Since 2010, Thies’s team has increased exposure to absolute return and Ucits-compliant hedge fund strategies.
“Retail clients do not care about benchmarks. They care about absolute returns and we integrate this into our process by integrating those funds in our traditional multi-asset products at the moment.
“Retail clients are also very interested in some kind of tail risk hedging. They want to avoid markets such as 2008, when we saw very high correlations among various asset classes. We use Ucits hedge funds in our traditional multi-asset portfolios to diversify and reduce risk.”
The team has used many strategies (long/short equities, global macro, commodities and volatility strategies among others), but deploys only a handful at the moment.
“Our focus on these strategies is stronger now as the universe of hedge fund strategies offered in the Ucits framework has increased significantly. But you must be very careful when selecting Ucits hedge funds, as they do not generally have a longer track record and product quality differs.”
She says alternative and absolute return strategies work, especially in the low interest rate environment. “It is a good opportunity to add funds that have complementary investment strategies, rather than just pure equity or fixed income.”
The team will also closely monitor a fund’s performance as it grows, to identify any erosion of alpha.
“It can be more difficult for managers to stick to their investment process if they grow quicker than the market they invest in. As soon as we see performance fall and a causal relationship with rising assets under management, we reduce the position or sell it.”