Jens Kummer is very well positioned to compare mechanistic and discretionary investing.
Kummer notes allocators can switch rapidly using ETFs. This is important for SEB AM’s product, whose annualised turnover in today’s turbulent markets is between 200% and 1000%, depending on the market.
“In very turbulent times we shift the fund aggressively as our model tries to build an efficient portfolio. We adjust it weekly, and you can see some radical shifts. With ETFs, no manager is irritated if we go into an instrument and then, one to four weeks later, sell the position. ETFs are also transparent, and flexible.”
Trying to keep implementation costs low, Kummer’s unit has seven banks bidding for ETF business with it.
“Since launching in September 2008, we have made over 20%. Compared to all other asset classes we show positive returns, and our drawdowns are in line with our risk budget. We have noticeable market exposures, clear deviations from benchmark.”
The product’s largest peak-to-trough loss was 12%, in last year. This is large in absolute terms. But it is small compared to comparative figures over the same period of 43% for European equities (MSCI Europe), 30% for hedge funds (in their base currency, USD), or commodities (CRB, euro).
SEB AM’s various multi-fund investment products aim to profit over 12 to 18 months, with “high participation in rising markets”. They try to limit any 12-month losses to between 2% (Defensive and Defensive Plus) and 10% (Balance), on 90% confidence levels.
“The strategy manages shortfall risk, but not at the expense of long-term focus,” SEB AM material notes.
Kummer says: “The main pillars of our approach are long-term expectations and short-term risk awareness. We compare the long-term attractiveness of different asset classes, and we have a view for all countries in the developed and emerging world, all European sectors, government bonds with different maturities, corporate, high yield and EMD. Then we take into account the short-term risk potential.”
Volatility is one measure of risk, but SEB AM also uses others.
While the products can span all asset classes, explanatory material highlights there is neither short-selling nor leverage, but a focus on liquid instruments, and “targeting of mispriced risk premia across markets”.
If the model’s rules mark a signal against a market – as they did for equities in summer – Krummer’s team may not gain exposure to it. “We had the same consideration three years ago – before Lehman Brothers collapsed we had no equities to May and April in 2009, when it said to take on risk again.”