Headquartered in London, with offices in Madrid, Frankfurt, Lisbon and the Americas, Santander’s Global Multi-Asset Solution arm is an undoubted global player.
All in all, there are 25 investment professionals, with the unit structured into three sub-teams: a dedicated manager research team headed by José Maria Martinez Sanjuán, the fund management team led by Toby Vaughan, and the investment solutions team headed by Cristina Rodriguez Iza.
Wide reach
Santander Asset Management itself manages around €22bn (£17bn) in nine different jurisdictions globally, while influencing substantially more by way of guided architecture and advice. It runs a number of different strategies and has funds in four broad categories: risk managed, risk profiled, single asset and total return.
The risk-profiled ranges are a suite of funds in each country that are designed to map a specific client type, categorisation and advice process; and the objective is to maintain those risk buckets with an attractive risk-return outcome.
In the risk-managed approach, single assets are typically used as building blocks in other multi-asset portfolios, while the total return products are managed towards an investment outcome over a business cycle.
Santander Asset Management’s investment process in Global Multi-Asset Solutions, built during the past 10-15 years, is “a continuous evolution of the investment process”, according to Tom Caddick, head of the multi-asset solutions team, who joined the firm in 2010. He says Santander’s investment process is predicated around consistency, robustness, scalability and being able to leverage skills and specialisms within the team.
“It is very much a centralised investment process, so we don’t operate what we would call a ‘star manager’ approach within the unit. Every team member has a role to play within the overall process, which they contribute to the whole,” he says.
“The investment process looks to break down the available sources of alpha within a portfolio and then isolate and focus on those areas, of which asset allocation would be one.”
Target practice
But, says Caddick, there are other areas such as asset class strategy, bottom-up selection, risk controls and management, which, he argues, “can generate alpha as well as save you from loss of alpha”.
Team members target particular areas, specialise and focus on them, and then bring this to the core approach.
“Strategic allocation acts as our initial way of determining what is the right mix of assets is to generate an outcome over the long term, while we think of tactical as being our positioning through the business cycle.”
He explains that the multi-asset team has regular and periodic tactical asset allocation meetings every month where they review the backdrop.
“It gives us a series of factors to look at to determine whether we believe the particular factor in question is positive or negative for the asset class, to what degree, and the likelihood of it playing out.”
In the shorter term, those factors could include momentum, sentiment and market turbulence. However, Caddick stresses that those tend to be very short-term factors used in extremes.
“For example, it may only be at the point of market euphoria or panic that a trigger is something that you might want to listen to,” he says, adding that macro and corporate backdrop would be medium-term factors, and valuation and thematic long-term.
On the map
In the UK, Santander runs a risk-managed range called Atlas. The funds are designed first and foremost to map to a particular client’s risk appetite, which is determined through a range of volatility outcomes.
“Volatility overlay is one of the key drivers of those portfolios, and the Atlas range ties in to a specific advice model, for those that use tools like Distribution Technology’s Dynamic Planner,” says Caddick.
In terms of equities, he says he has moved from being overweight US to a neutral to underweight position in favour of Europe and Japan.
“We are overweight developed and underweight emerging markets. I cannot see those themes shifting significantly in the near term. Overall in equities we are still marginally overweight, albeit lower beta, on a global basis. We haven’t aggressively gone back into equity markets despite the sell-off that we have seen recently.”
Caddick says that, arguably, investors hold sovereign debt for liquidity and insurance within a portfolio but, given current valuations, the former rationale is severely tested.
“You have to be more selective than ever in order to use sovereign as an insurance. On the whole, we are underweight and negative on this area.
“On the credit side, we had favoured high yield. We would certainly favour corporate debt and investment grade over sovereign but we are not significantly overweight in that space.”
According to Caddick, there is a good argument for having a bias towards sterling assets for sterling-based portfolios, which his department does within the portfolio.
“That home bias sometimes gets misinterpreted. For accounts with a developed market base currency, a bias to base helps control volatility.”
Trust in absolutes
Meanwhile, Santander is – and has been for some time – a significant user of absolute return strategies.
“We use them in different ways in the portfolios. We are in a low-growth, low-inflation, low-return environment, so in terms of eking out returns, it is very useful. It’s also very useful to diversify portfolios.
“Certain strategies will give you some beta exposure in disguise but, depending on how you use absolute return, you can get portfolio correlations close to zero. So it can be a very useful diversifier from that perspective, while not necessarily an insurance. We tend to also focus our exposure at the lower end of volatility within portfolios.”
Santander has no direct exposure currently to property, other than second-line exposure, especially given fears of a liquidity mismatch, according to Caddick, which should not be ignored.
“If you are investing directly in bricks and mortar, as a sizeable investor you are creating a mismatch if your portfolio is daily priced with daily liquidity. By the very nature of the portfolios, you have a mismatch.
“It is not necessarily our single reason not to invest, but there is the issue for consideration. The valuations are not nearly as compelling as they were in the commercial space and I am not convinced that this is a particularly good time to get involved with property. We could see investment in the future but I have no anticipation of getting involved anytime soon,
“Let’s face it, the Fed has been the forerunner of forward guidance and has become quite effective at it.”
UK central bankers have tried to adopt more of a forward guidance policy, along the more explicit lines of the Fed. Caddick’s view is that US rates will see a steeper climb this year than consensus suggests.
“We are anticipating 25bps increments, maybe three or four hikes this year. The US has taken a different approach to many other developed countries, taking a more accommodative stance through both fiscal and monetary policy.
“They are in a position where the dollar is strong, the economy is looking alright, but valuations are no longer overly compelling. Our anticipation is that we should see positive returns out of the US from here, but you can probably get better elsewhere”.
Fine China
China is a major driver and engine of global growth to be ignored at your peril, in Caddick’s view.
“Clearly, we are going into a phase of managed slowdown, but we have been in that phase for some time now. There have been a few missteps along the way, such as putting in place the short-term, ill-fated stop-losses on the market and not allowing free movement. But this was recognised early and addressed. And although there is definitely some excess capacity to play out, I think China could end up surprising on the positive side later in the year.”
Meanwhile, the UK is in a low-inflation, low-growth environment with broadly supportive monetary policy. Caddick has no expectations of shorter-term revisions upwards on the UK interest rate front, and says that probably the biggest risk at the moment is the Brexit.
“It is far too early for us to say what will happen. But it can create uncertainty – and markets do not like uncertainty, rewarding us with volatility.”
