Sideways markets
Apollo Multi-Asset Management runs an offshore fund of absolute return funds as well as using various strategies in its onshore portfolios. Fund manager Ryan Hughes has been frustrated by long/short managers this year, though global macro and market neutral funds have also disappointed.
He says: “The markets have gone sideways but the way they have got there is unusual. We had a big sell-off and then a huge rally in areas that were massively out of favour, followed by a broad return to equilibrium.
“Many long/short equity managers were caught out in February in a dramatic reversal of the trade that was long quality and short miners and oils. Most were the wrong side of that trade and have been slowly eking out a recovery in the past four months to get them broadly neutral for the year.
“The nature of the return has been the real driver of that, and high-quality managers with great track records such as Threadneedle UK Absolute Alpha and Henderson UK Absolute Return have found things difficult.”
Henderson’s Luke Newman, manager of the latter fund, says while there has been much to worry about this year, heightened volatility has created an ideal stockpicking environment. “Oil, resource and emerging markets-focused stocks are the volatility ‘culprits’ but our tactical book has enabled us to stay flexible around moves in currencies and underlying commodity prices.
“We came into 2016 slightly short in stocks exposed to those factors but quickly took action to cover that once we saw yield curves starting to flatten again.”
Within the fund’s core book, Newman favours long positions in dividend growers, such as insurers and some publishing companies. He says he is now shorting over-leveraged companies and “low wage payers”.
“Minimum wage legislation has prompted a reappraisal in a number of sectors that until recently enjoyed minimal wage inflation,” he says. “Retail, food retail, leisure and outsourcing sectors will likely see an increase in labour costs, while low inflation will mean their revenues won’t keep pace. We have some ‘slow burn’ shorts in such companies.”
It is not just long/short funds that have suffered in tougher conditions, and managers have reacted accordingly. The team behind Standard Life Gars recently held a pairs trade being long the dollar versus the euro in fear of Brexit and mixed economic data on the continent. Elsewhere, the managers of the Aviva Aims Target Return Fund have increased exposure to global equities and added to a US inflation strategy with the focus on a theme of global reflation.
