Meeting points
Whereas the team has a formal policy meeting once a month, not a day goes by without the managers discussing policy. During the ‘official’ meeting, they run through all the trades, re-run the automations, re-assess whether the risk-absorbing trades are in fact so, and examine the expected return on the more aggressive driving positions.
“There are two different dynamics at play here,” says Vorm. “One is the strategic balance – where we see the best opportunities – and the other is ongoing, daily updates of proprietary models, based on underlying work done by the team to carve out specific return drivers that we put conviction on.”
The strategic part of the portfolio is a slower-moving vehicle, but part of the risk could be taken on something that is very dynamic and frequently updated underneath, he explains.
“Through the daily work we are constantly bouncing ideas and challenging each other,” says Hansen. But, in the end, both managers agree their process relies on mathematical facts that are not open for discussion in the same way macro-driven strategy is.
However, they are not disconnected from what is going on around them. “We do have models built on a fundamental view of what we think the logic should be in the investment community, and those drive input to the policy meeting rather than, say, recent Fed dots,” says Hansen.
“In that way, we consider what to look out for, and it’s easier to discuss the weak spots at the moment in the investment ideas with regards to the quantitative models and how we relate to them,” says Hansen.
So the qualitative discussions are risk-driven; they centre on the risk to the input the managers are seeing from the underlying models.
Earning power
A big concern weighing on investors’ minds are European earnings that have not been growing since 2009-10.
“European equities have not been doing anything for the past 10 years,” Hansen says. “Earnings are not growing in the developed markets and particularly not in Europe, where, during the past decade, they have been declining.”
According to Hansen, this is due to headwinds for the strategic earnings growth picture in both developed and emerging markets. “It poses the interesting question of how to deal with that. The low return environment, which is not new in the equity market, is now coming to the bond market.
“The problem is just about everywhere, and it is interesting to think about how we can get out of this trap where earnings are not growing.”
But the big challenge in today’s financial market, according to the managers, is to give people the ability to sleep soundly at night, throughout these volatile years.
