Uncertainty and therefore volatility. These have been the premises that have been the protagonists of the last few months. However, there is one fund that, despite last year’s bad year, coped quite well.
Luca Sibani, Head of Total Return and Discretional Investments at Epsilon SGR and manager of the Eurizon Absolute Prudent fund, provides details of the fund’s investment strategy and outlook for this year.
– What is the fund’s strategy and how is it constructed?
Eurizon Fund Absolute Prudent invests predominantly in short-term bonds, which represent the Strategic Portfolio, together with a Tactical Portfolio, which is composed of strategies pertaining to the Fixed Income, Equity, Credit, and FX markets, and implemented through the liquid and exchange-traded derivatives.
– What type of investor is it designed for?
The Fund’s objective is to achieve a positive absolute return, but its strategy differs from other funds in its category in that it has low volatility and low correlation to financial markets, particularly risk assets. It is therefore suitable for both investors with a conservative profile and asset allocators looking for products with little or no correlation to the markets.
– How is the Eurizon Fund Absolute Prudent portfolio divided?
The Strategic Portfolio is composed of government and corporate bonds with maturities of less than 3 years and with an investment-grade credit profile. The Tactical portfolio trades in Rates, Equities, Credit, and Foreign Exchange and is composed of strategies that originate from the investment committee’s ideas and can be long or short in any of these asset classes through derivatives.
– During 2022 the fund did very well, what are the reasons behind that?
The past year has been very challenging for the financial markets. Nevertheless, the Tactical Portfolio achieved a positive performance with a strong contribution from the Equity component. However, the Strategic Portfolio, for the first time, made a negative contribution as short-term interest rates rose sharply.
– Recession and stagflation are part of the risks seen for this year, how do you face this scenario? How can the fund deal with this situation?
For this year, the risk of recession is greater than that of stagflation, as inflation figures worldwide peaked in 2022. The scenario we have in mind is one in which central banks stop raising interest rates relatively soon. In this environment of high short-term interest rates, the Strategic Portfolio should support annual performance and finance the strategies of the Tactical Portfolio: the latter, in fact, is positioned for a tail-risk scenario, with short positions in the major European and US equity indices.
– What trends do you identify for both fixed income and equities in 2023?
Both fixed-income and equity markets are betting on a soft landing scenario accompanied by a sharp drop in inflation. While we empathize with the view that inflation will fall at the same rate as it accelerated last year, we expect a more pronounced deterioration in economic activity globally. For this reason, we expect bonds to outperform equity markets in 2023.