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The case for
Head of Multi-Strategy, Sanlam UK
May 23, 2022
Events like the global financial crisis (GFC) of 2007-2008 and the outbreak of Covid-19 triggered unprecedented levels of economic intervention and support by authorities worldwide. The stimulus measures have driven bond yields lower and equity prices higher following both events. Although these support measures have been welcomed, they do leave investors relying on a combination of traditional equities and bonds with a conundrum: where and how to allocate their funds.
To put this into perspective, since the start of the GFC, the 10-year government bond yields in the US, the UK and Germany have fallen from highs of 5.3%, 5.5% and 4.7% respectively to lows of 0.50%, 0.07% and -0.86%. The policy response following the outbreak of the pandemic drove bond yields to similar levels in the second quarter of 2020.
It is worth highlighting that the current uncertain market environment makes it difficult not just for investors but also for central banks as they look to balance economic growth and inflation. During such periods, investors typically flock to perceived safe assets such as government bonds. However, even though nominal government bond yields have recently risen closer to 3% on the back of prospective interest rate hikes, it is very difficult to make a case for owning a bond that will deliver a negative real return in the high inflation rate environment that investors currently find themselves in.
In this challenging environment, there is certainly a strong case to be made for investing in alternative assets or strategies. The list of alternative investments available is as long as it is broad – it covers areas as diverse as private equity, high-yield bonds, hybrid capital bonds, equity and bond derivatives, structured products, property, renewable energy, infrastructure, volatility and even cryptocurrencies.
Some investors may choose to follow single-asset-class strategies, but for others, an allocation to a multi-strategy option will be more suitable. As an alternative investment to bonds, any solution chosen should be managed with an absolute-return objective and should seek to reduce the downside risk for investors.
One of the main attractions of a multi-strategy fund is the flexibility to adapt to changing market conditions. This flexibility is a function of not having a set asset allocation benchmark and allows the fund manager the freedom to defend when needed and to attack when opportunities present themselves.
For example, given the market volatility seen this year, the Sanlam Multi-Strategy Fund has reduced its equity exposure from 25.7% at the beginning of the year to as low as 11.8% more recently, through a combination of active position management and the impact of equity index put options. This defensive stance has allowed the fund to take advantage of prevailing market weakness by buying higher-yield bonds and equity call options. While not immune from market weakness itself, the defensive action taken has also helped to limit the drawdown experienced during the sell-off seen year to date and sets the stage for us to participate if markets do rally in the near future.
Unsurprisingly, selecting which fund to own is far from simple. The Morningstar database currently lists 662 funds across its various multi-strategy categories. For those funds with five-year historical data available, the average fund has delivered an annualised return of 1.23%, with the best-performing fund rising 11% annualised and the worst falling 7% annualised.
To complicate matters further, while the two funds have similar net assets, their investment processes differed greatly, with the worst-performing fund using a macroeconomic-driven investment process, whereas the top-performing fund followed a more growth-orientated objective. This demonstrates the vast differences in funds available within the sector.
Investors find themselves in an environment of extended uncertainty fuelled by inflation, monetary policy, war in Europe and the ongoing economic disruption created by the pandemic. As a result, the case for portfolio diversification remains stronger than ever, and with most asset classes experiencing heightened levels of volatility, an allocation to a flexible, multi-strategy, absolute-return fund that can dynamically shift its asset allocation, and has the freedom to seek opportunities in multiple asset classes, makes a lot of sense.
However, outcomes are not guaranteed and there can be huge deviations in returns. As always when selecting a fund, understanding a manager’s style and investment process is key.
Note by Alwyn van der Merwe, Director of Investments at Sanlam Private Wealth
The strategy and process of the Sanlam Multi-Strategy Fund provide an absolute-return building block for balanced fund solutions to our clients. As explained above, it is not immune from sharply declining equity markets over the short term, given its equity exposure (limited) and exposure to the Real Assets Fund. However, through the cycle, the Sanlam Multi-Strategy Fund should demonstrate less volatility than pure equity exposure, and should beat cash handsomely.
Against this background, we’re advocating an approach in which global cash holdings are restricted and exposure to this strategy is increased – which is likely to beat inflation without incurring asymmetrical risk in our clients’ portfolios.
Mike Pinggera is the manager of the Sanlam Multi-Strategy Fund, a diversified, absolute-return investment fund incorporated in Ireland. The fund, which aims to participate in rising markets and defend capital during downturns, was recently announced as Best Fund over Five Years in the Absolute Return GBP Medium Category at the Refinitiv Lipper Fund Awards United Kingdom 2022.
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