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Sector Focus: Manager views

The absolute return sector covers many strategies and investment approaches. Andrew Ford of Standard Life outlines how its GARS fund is positioned in the current economic environment while Ian Winship of BlackRock looks specifically at the outlook for fixed income.

Andrew Ford

The GARS fund is constructed to perform in a range of outcomes.

There are currently various currency positions in the fund that have attractive hedging characteristics. For example, our long US dollar vs short euro strategy is an excellent diversifier against systemic risks emanating from Europe which could result in equity market sell-offs.

We feel that buying core sovereign bonds at current yields is the investment equivalent of picking up pennies in front of a steam roller.

Our US equity large cap vs small cap strategy provides defensive ballast for the portfolio as it works best in a declining equity market, a useful trait given that duration is currently at the lowest level since inception.

We have positioned the portfolio to benefit from profit opportunities in areas of growth such as US equities, in particular the technology sector, and Chinese equities.

Sustainable yield remains a key theme in the fund, as evidenced by our holdings in credit, high dividend-yielding European equities and Reits.

Several positions in the fund look to take advantage of developing market disparities, such as our long Indian rupee vs short Singapore dollar position. We believe this position will benefit from reforms in India that will open up the economy to increased foreign direct investment.

On the short side, we believe that the global slowdown and realignment of China’s economy from an export focus to one driven more by domestic demand will continue to act as headwinds to Singapore’s economy, reducing demand for the Singapore dollar.

Fiscal advantages of resource-based economies is a further theme, with exposure to Mexico and the peso key elements of this.

Andrew Ford is investment specialist, absolute returns, at Standard Life Investments

Ian Winship

What do I do with my fixed income exposure? This is the question we are asked most often as yield levels reach historic lows and the asset class can no longer be viewed as being ‘risk free’. Client demand for fixed income will remain but we expect to see more clients switching to more flexible and diversified strategies.

The BlackRock Absolute Return Bond Fund seeks to reflect the best of our active fixed income capability. We combine the alpha captured by a truly diversified global team with our portfolio and risk management tools to provide a product designed to make the most of these more volatile times.

We believe that performance in 2013 will continue to be driven by Central Bank support for ‘risk free ‘ assets. The stability offered by core government bond markets in the US, UK and Germany will remain a positive for risk assets such as equities, emerging markets and credit.  A sharp move higher beyond the expected yield ranges over 2013 would have to reflect a material improvement in economic growth data. At this stage, we think this to be unlikely.

Current positioning
Rates: Core government bond yields will remain low and trade within a narrow range. Our teams in Asia, Australia, US and UK aim to be tactical and disciplined in pursuing relative value trades.

Duration: We are using duration hedging strategies to protect the fund from sudden volatility in interest rates, such as what we are seeing today in Japan.

Credit: While rates in developed markets remain steady, grab for yield continues to be a factor. With the expectation that interest rates will rise gradually from here, stock selection becomes more important. Going forward, we believe alpha generation relies on more diversified global credit exposure and our US, UK and European strategies are adding real value, while we look for opportunities to increase our credit exposure in Asia and Emerging Markets.  

Emerging markets: We have seen a rotation towards corporate debt from sovereign debt. We continue to support this theme and have adjusted our exposure to benefit from more diversified exposure in this asset class.

Ian Winship is head of sterling bond portfolios within BlackRock’s Fundamental Fixed Income


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