17 January 2019
We asked a number of our fund managers to consider why non-directional investment strategies might be of interest in a more challenging post-peak environment.
Group Head of GAM Investment Solutions and Chief Economist
A post-peak world requires renewed emphasis on portfolio construction and, in particular, the important role that non-directional strategies can play. Within this new framework, we think portfolios should be constructed on a 30% / 30% / 40% basis rather than the classic 60% / 40% balanced portfolio of stocks and bonds. In this 30% / 30% / 40% world we still want to take selective risk in equities (30%), while in the fixed income bucket (30%) we will look for shorter duration specialist credit strategies in a bid to augment returns and income. But to us, it is the 40% block devoted to alternatives that would primarily play the key role of portfolio diversification. These non-directional strategies should not be correlated with movements in equity markets or movements in interest rates in order to provide a more robust portfolio outcome.
GAM Systematic – Alternative Risk Premia
Non-directional strategies have the strong benefit that they do not depend on the underlying market environment to generate returns; more specifically they do not depend on equities moving up or bond markets moving up, but focus on the extraction of spreads which are non-directional. The return sources we are seeking to generate are independent from equities and bond markets and that's a big benefit because those two asset classes are what investors mostly have in their portfolio. We are able to offer diversification from the core return drivers that investors have in their portfolios and that is why they are currently very attracted to systematic non-directional investments such as alternative risk premia.
John SeoCo-Founder and Managing Director of Fermat Capital Management LLC
The benefit of non-directional alternative strategies in 2019 is very simple: Insurance Linked Securities (ILS) are tied to a risk that has nothing to do with the economic cycle, political environment, currencies or anything like that. Instead ILS is connected to natural phenomena, such as earthquakes and hurricanes, which are very well characterised and cannot be caused or triggered by any action in the financial markets. This simplifies the way ILS can be placed into a portfolio, which can create tremendous benefits.
Investment Director – Interest Rates and Currencies
Given our outlook for the more traditional asset classes in 2019, we think the real opportunity lies in non-directional strategies, in particular some of those strategies that have more of a relative value bias such as fixed income or equities, as well as currency – another asset class which has fallen out of favour in recent years, but where we believe there are some very good opportunities. As central banks withdraw some of the liquidity in the system, we are moving from a situation where markets have been policy driven to a situation where markets are much more fundamentally driven and this is where the opportunities arise. Therefore, non-directional strategies are an emerging theme for us in the next 12 months, particularly because they have the ability to profit in bear as well as in bull markets.
GAM Systematic – Credit
We are coming to the end of a long run of bull markets, especially in the credit space, and we have recently seen the first hiccups emerge. Therefore, strategies that are able to be profitable not just in bull markets but also in bear markets are the ones that are likely to outperform in this kind of climate. As we see credit spreads starting to rise it is important to have strategies that are able to profit in this rising spread environment, where markets are likely to turn. We think non-directional strategies are therefore well positioned for 2019.
Investment Director – Mortgage Backed Securities
The US mortgage based securities (MBS) market is somewhat of a unique market in that it is possible to develop strategies that are highly uncorrelated to many other fixed income indices. This is the specific approach that we employ at GAM Investments, and have employed for 16 years, and has a very low correlation with most other fixed income indices, which is appreciated by investors. If the economy is now peaking and there is a little more uncertainty about the future, notably about growth rates and interest rates, a strategy that is not dependent upon interest rates or the direction of the economy should be very attractive to people right now and that's one of the reasons why we are still very positive on the MBS market as an investment area.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a specific security is not a recommendation to buy or sell that security. Past performance is not an indicator of future performance and current or future trends.