Edouard Carmignac, the charismatic founder of Carmignac Gestion, stepped down from the group’s flagship funds in January.
The move follows a tumultuous period for one of France’s best-known asset managers that has seen key funds Carmignac Investissement and Patrimione lag their benchmarks leading to waves of client redemptions. The firm is also under investigation by French authorities over alleged tax fraud.
The group needs to realign its business, admits managing director Didier Saint-Georges. “We have taken a really hard look at performance,” he says. “And we found some patterns.”
The Paris-based firm, which Edouard Carmignac founded in 1989, built its reputation on shrewd top-down analysis and Saint-Georges is adamant its big picture worldview remains solid. What has been lacking, he concedes, has been discipline.
“The discipline that links the analysis to the market conclusions and the positionings in the portfolios had slipped,” he says, seeking to explain the underperformance.
Strategic oversight
Carmignac’s top-down analysis last year predicted the market faced a collision between a global slowdown and shift in monetary policy. “We got it spot on,” Saint-Georges asserts.
“When the economy is slowing down, but interest rates have yet to come down you typically see late-cycle inflationary pressures which can fuel volatility,” Saint-Georges says. “We saw it coming but we kept an exposure to equities that was too high.
“If we had been disciplined, we would have been underweight in emerging markets as well because they are sensitive to dollar liquidity – but we were not.”
In a bid to establish more strategic discipline in future, the group set up an advisory committee late last year – comprised of senior figures Edouard Carmignac, Frederic Leroux, Rose Ouahba, David Older as well as Saint-Georges – to ensure the firm adopts a more joined-up structured approach across its business and keeps an eye on any inconsistent portfolio positions. “It’s a matter of discipline,” Saint-Georges reiterates.
Passives threat
Last year saw passive funds attract more than €270bn in global flows at a time when long-term mutual funds suffered net outflows of €530bn, according to State Street.
As a pricey active manager this structural shift has also had an impact on Carmignac’s business. “The momentum has been in passive funds favour,” Saint-Georges admits, adding that the end of the decade-long experiment in quantitative easing should shift momentum back towards active managers.
“When markets enter real bear market territory passive funds may lose a lot of their shine. Until then, the burden of the proof is on us,” he says.
“The problem is that many active managers, including ourselves, have not been convincing enough in recent years. The case for active management, therefore, remains to be made.
“Central banks are at a standstill. The US Federal Reserve is now saying it cannot raise rates much further. The ECB has stopped QE and cannot move one way or the other.”
“Therefore, the influence of central banks is likely to be smaller and the economic reality comes back to the fore,” he says,
“This new phase is going to be like it was before 2009 when fund management was based on reaction to the markets and the economic reality on both a micro and macro level.
“Not everyone can beat the market. In the past, we were part of a small minority that could. Now I hope we are set up to regain that capacity.”
This year’s big calls
Saint-Georges continues: “Very often in active fund management you have two or three big calls you have to get right to make a difference.”
“This year it will come down to big questions that are not easy to answer – such as where the Chinese economy is going.”
China’s economy is growing at its lowest annual rate in almost three decades and Beijing has lowered its growth target this year.
In the eurozone, meanwhile, growth has also slowed. Italy’s economy tipped into recession at the end of last year and German forecasts have been depressed by weak data.
“Italy cannot afford a serious recession – when credit spreads widen, and debt becomes more expensive – because that would send its economy into a downward spiral,” he adds.
“The global economic slowdown risks are asymmetric because of China and the potential impact of a bigger slowdown on very leveraged economies.”
Long-short strategies
As a result, Carmignac’s equity exposure is “below the maximum”, Saint-Georges says. Equity exposure on bigger balanced funds, such as €13.4bn Carmignac Patrimoine, is just over 40% compared to a maximum of 50%.
“In the current market, a mild slowdown is already priced in, so you’ve got to rely on your alpha generation. You have to work out which stocks will outperform in this sort of scenario,” Saint-Georges says.
“The big US tech stocks, such as Facebook and Alphabet, are not really defensive because they can face heavy sell-offs. However, they are stocks that are likely to outperform during a period of tepid growth. They need to be a core part of your portfolio, but you need to be fairly smart.”
Saint-Georges adds that tech-led disruption is likely to overhaul key industries such as retail, autos and finance in the next few years. “Disruption will cause winners and losers. So, it’s exactly the right environment for long-short strategies,” he says.
Carmignac soft-closed its European long-short equity fund in November following significant inflows and recently launched a global long-short equity fund.
“We’re taking long positions in stocks that are expected to appreciate and short positions on stocks that are expected to decline. On the equity side, we’re overweight on a few high-quality growth stocks as well as tech, and some consumer goods. But these positions are not buy-and-hold – they are actively managed.”
“They are sectors that can get hyped up and then smashed down. The sizing of the positions, therefore, needs to be managed in a very disciplined way. Hopefully, we’ve got a bit more discipline than we had in previous years.”
