Fund managers adapting portfolios

2nd March, 2022

It has been well-flagged that financial markets in 2022 are likely to break with recent history. The same strategies that have driven markets higher over the past decade. We ask two fund managers with flexible strategies how they are positioning for the year ahead.

Eva Sun-Wai, lead manager on the M&G Global Government Bond strategy and deputy manager on the M&G Global Macro Bond strategy

“People assume that bond markets are vulnerable in this environment, but there are areas that are reasonably well-protected, such as floating rate notes or inflation-linked bonds. There are major advantages to being in a strategic portfolio. Any view we can have can be implemented in some way in the fund. Strategic diversified bond portfolios can be reasonably good protection against the vulnerabilities we see in markets today.

We are short duration compared to our benchmark. That is a mix of both an underweight in physical bonds, but also draws on futures and swaps to take out particular areas of the yield curve where we’re less comfortable.

Over Q4, we were positioned for a flattening of yield curves with the short end to spike a lot more than the long-end. Since then, we’ve shifted into steepeners as curves have been extremely flat. If we get any undershoot in inflation, those curves should start reversing reasonably quickly.

“We’re still reasonably bearish on developed market rates, reflected in our short duration positions. We do have some inflation exposure but have taken it down over the year as valuations have plateaued in recent months. On emerging markets, we’ve been more cautious. Over the second half of last year, we put on some hedges through swaps. Since then, we’ve had a big spike in spreads, we are currently deciding whether to take off some of those hedges and add a little bit of exposure

“To sum up, we’re mostly short developed market duration, selective on emerging markets and selective on inflation. We are reasonably bearish on spreads, but like floating rate notes.”

Ellie Clapton, portfolios specialist, multi-asset team at Ninety-One

“Our portfolios are more consistent with near-term cautious outlook, not just around equity risk, but also interest rate risk. We can draw on alternative levers to adjust the risk we have to equities and to duration. Because have access to a broad multi-asset universe, we select individual securities within those different asset classes.

Our investment style is well-priced after a period of underperformance. Equity markets have been led by either growth or deep value. Resilient high yielding equities have lagged. The stocks we hold in the portfolio present an attractive valuation opportunity compared to the broader market.

“We select individual securities from the bottom-up. We continue to identify significant opportunities even when opportunities look stretched. Select emerging market bonds appear to offer generous risk premia, relative to developed market bonds. We can access that in a relatively safe way by owning local emerging bonds on a currency hedged basis.”

“We expect volatility to be a feature of the market this year. Because we have a range of alternative levers, we can manage risk in a way that didn’t happen in 2021. Markets will be episodic in nature and we’ve got the toolkit to capture upside and manage on the downside.”

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