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Magazine Extracts – Investment Funds that resist coronavirus
Investment Funds

Magazine Extracts – Investment Funds that resist coronavirus

This new section of our web is going to be dedicated to showcase some of the Magazine’s articles in order to gain visibility for our collaborator’s work.
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23 JUN, 2020

By Constanza Ramos

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This new section of our web is going to be dedicated to showcase some of the Magazine's articles in order to gain visibility for our collaborator's work. We believe that the Magazine has some excellent, innovative and informative content, hence we choose to start to share them on our website as well. In this edition you can read a section of our interview with Mussie Kidane.

Markets have been shocked over the past couple of months. Everything which had been running smoothly came to a quick and screeching halt. We saw a democratic selloff which took down small and mega caps alike taking us into a bear market. During mass market sell offs it's difficult if not impossible to structure a portfolio in such a way to not suffer a draw down. This is best illustrated by the disproportionate effect stocks with high liquidity incur when markets trade down collectively. Thus funds have relatively even exposure across asset classes and levels of markets in the short term. It's important to analyze funds as they correspond to their respective benchmarks. The same metrics as a fund specializing in the same sectors yet in North America.

Actively managed money across the board has taken a hit. But a select group of managers have structured funds in such a way that they weathered the storm. Hedge funds in theory have an inherent edge here due to their unique ability to have “insurance” in the form of CDO’s and other short positions. We compiled a group of funds that have weathered the storm well. Their ability to do well in trying timesis impressive and certainly paints the funds in a positive light.

Jean-Philippe Donge
Head of Fixed Income at Banque de Luxembourg Investments

JeanPhilippe
Jean-Philippe Donge

January 2020 ushered in a year of some potential for all fixed income asset classes. The stabilization or narrowing of spreads during 2019 left room for some economies to make their mark. However, announcements of a virulent pneumonia spreading in China during January quickly shook the confidence that the market had acquired in 2019. On 30 January 2020, the World Health Organization (WHO) declared ‘a public health emergency of international concern'. Some ten days later, it announced the official name of the pandemic virus: COVID-19. With China at the epicenter of most global production chains, the virus spread rapidly across the world, from East to West. Chinese and peripheral industries and economies came to a standstill for the remainder of the first quarter. Soon the world was in lockdown. The virus caused a fall-off in supply and demand which sent prices of raw materials plummeting. By the end of March 2020, the world realized that the health crisis would create major economic instability on a large scale

Since the beginning of 2020, Fixed Income markets performance can be split into different phases. During an initial phase, as the epidemic was spreading in Europe, both risky issuers’ yields and AAA Sovereign’s yields were heading lower. Then risky assets started to capitulate. The third phase saw all fixed income assets classes selling off. US Treasuries and German Bunds were no exception. In this context, the Federal Reserve announced a series of cash-injection measures aimed at curbing the effects of the pandemic on the economy.

Overall, US Treasuries posted a strongly positive performance in the first quarter of 2020. The J.P. Morgan index for this market gained 8.95%. The US 10-year yield ended the quarter at 0.67%, which is 124 basis points lower than at the end of the previous quarter. In March alone, the Federal Reserve lowered its key rate twice, cutting it from 1.75% to 0.25%. When looking at its balance sheet, between December 2019 and end of April 2020, the Fed’s assets rose from $4.1tn to more than$6.6tn.

With those new measures announced by the Fed and the ECB, among other central banks, we may have entered a new phase where we think yields in some asset classes have reached a peak, at least momentarily.

Geoffrey Schechter & Erik Weisman
Portfolio managers of MFS Meridian Funds - Inflation Adjusted Bond Fund

As we make our way through the coronavirus pandemic, we think investors should consider committing a portion of their portfolios to relative safe havens.  The global economy is experiencing its sharpest contraction since World War II, and in our view, the consequences have yet to be fully reflected in the prices of risk assets like stocks and credit.  One option to consider is government debt, including inflation-linked government debt markets.  While a strategy offering some insulation against the risk of rising inflation may hardly seem necessary in what appears likely to be a disinflationary or perhaps even deflationary environment in the near term, the MFS Meridian Funds – Inflation-Adjusted Bond Fund may have a place in investors' portfolios.  Let's briefly discuss why. 

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The fund's primary focus is on U.S. Treasury Inflation-Protected Securities (TIPS), which may provide a measure of diversification to portfolios holding allocations to riskier investments.  The performance of TIPS is largely insulated from changes in inflation expectations which impact other bonds, though TIPS are still exposed to changes in real yields like other bonds.  While it is true that increased issuance of U.S. Treasuries to meet the challenges of funding the U.S. Government's fiscal response to the pandemic could put upward pressure on TIPS yields, it is equally possible that the Federal Reserve's  unlimited QE program will keep TIPS yields in check.  Real yields seem unlikely to rise meaningfully (or TIPS prices to fall) in a recessionary environment where Fed buying is lending support.  Additionally, market measures of inflationary expectations are currently historically low, suggesting that now may be an opportune moment to establish or add exposure to TIPS.  Moreover, if the Fed is successful in keeping nominal yields low and eventually generating higher expectations for inflation in the out years, real yields may have scope to fall further, boosting TIPS' prices.

While TIPS can potentially provide a relative source of stability in portfolios here and now, where they could make a real difference is post-pandemic.  It will likely take time for the global economy to regain its footing when coronavirus is behind us and fading to a bad memory, but when it does, the nature of the crisis response could make inflation protection a valuable feature.  Unlike governments' policy responses to the Global Financial Crisis of 2008, which were largely aimed at providing liquidity to the banking system and lowering interest rates, current programs appear more focused on "printing money" to provide funding to help individuals and smaller businesses survive the crisis.  All this liquidity being pumped into the system could eventually drive consumer prices higher – especially for manufactured goods made scarce by the difficulties of reestablishing global supply chains.  This is of course somewhat distant and conjectural, but very possible as the global economy returns to sustainable growth one day.  As a result, a TIPS fund could serve as a stabilizer now and an inflation management tool later.  

Andreas Fruschki, CFA
Head of Thematic Equity at Allianz Global Advisors

Mike Riddell
Head of UK Fixed Income at Allianz Global Investors

As markets have been exposed to high volatility in light of the Coronavirus pandemic, it is important to remember the inherent strength of a diversified portfolio: an investor’s best defense against a financial crisis. Allianz Global Investors believes that there is resilience to be found in Fixed Income as well as Equity strategies. Here are two funds that managed to outperform their respective benchmarks and helped stabilize investors’ portfolios during the recent market turmoils: 

The Allianz Strategic Bond fund is designed to be different. Launched in June 2016, the fund seeks to outperform the global bond benchmark through any market environment, while explicitly targeting a zero correlation with equities. It’s a total return focused strategy with a global macro investment process, managed by a team with a very strong 10-year track record. The Allianz Strategic Bond strategy generates alpha from four global macro sources to create a diversified source of returns: Rates, Credit/Spread, Inflation and Currencies. Central to the success of the strategy is the flexibility to position the portfolio to an evolving macroeconomic environment, in order to generate outperformance regardless of the market backdrop. 

The fund posted a very strong performance in March, outperforming its benchmark comfortably. The Fund’s duration, credit, inflation and FX strategies all contributed positively to returns. However, the main positive contributor was a large underweight to credit for the first half of March, at which point the portfolio management decided to close out the shorts and then add aggressively to Investment Grade corporate new issues, meaning that we outperformed as credit then began to rally. 

Allianz Thematica invests in seven themes derived from megatrends (e.g. innovation, demographic change, resources scarcity, or urbanization), all of which can be made investable through a combination of specifically selected individual securities: clean water and soil, digital life, health care technology, energy of the future, education, artificial intelligence and the pet economy.  

With a concentrated portfolio of 5 to 10 themes, flexibility is key: Themes within the portfolio will change with time and theme composition will constantly adapt as new themes emerge and older themes peak. 

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