Waiting for a game-changer
- We are Neutral on Long/Short Equity funds, with preferences for deep value managers, Europe over the US and Long and Variable Bias funds over Market Neutral.
- We are Overweight on Event-Driven funds, with a focus on US managers.
- Caution is still advised in the Credit / Distressed Debt segment as opportunities are far and few between.
- We are neutral overall in the Macro / CTA segment.
Clearer skies for Event-Driven funds
"The recent rebuilding of positions in small and mid-cap equities suggests that managers are seeking new opportunities more aggressively."
- Long / Short Equity. A supportive environment for equity markets has driven investor flows, particularly into passive exchange-traded funds. However, Europe offers greater upside than the US being less advanced in the cycle and showing greater catch-up potential. In addition, active managers such as hedge funds have begun to see an improvement in potential returns there. In Japan, the exit from deflation will boost corporate activity and help improve profits. Such an environment represents a challenge for Market Neutral managers, as does their growing use of leverage to seek additional return. Overall, a Neutral view, with preferences for deep value managers, Europe over the US and Long and Variable Bias funds over Market Neutral.
- Event-Driven managers with Special Situations strategies are classic deep value investors, in particular those with an activist style, an approach which should do well in the current context. The recent rebuilding of positions in small and mid-cap equities suggests that managers are being more aggressive in seeking new opportunities. The same factors are boosting Merger Arbitrage specialists. In addition, investors are less likely to punish predators for launching takeover bids, a clear indication of rising risk appetite, as is the recent trend towards more frequent bidding wars. The unwinding of last winter’s “Trump reflation” trades – combined with the reduced likelihood of regulatory overhaul – has pushed bid spreads higher, to between 4 and 6%, making for attractive arbitrage opportunities. Overall, an Overweight view, with a focus on US managers.
"Funds employing a multi-asset approach to emerging markets are attractive, given the ongoing economic improvement."
- Credit / Distressed Debt. Opportunities are few and far between. Credit Arbitrage specialists face ever-tighter spreads, driven by the continued rise in central banks’ securities holdings, meaning that return potential is limited at present. This may change as the Fed begins to scale back reinvestment of maturing bonds, especially as commercial banks have become much less active in making markets. However, Fed communication has been skilful in providing clear guidelines to investors and so opportunities in credit may take time to emerge. Our message on Distressed Debt is unchanged. As long as the backdrop remains supportive, opportunities will be rare. Overall, caution is still advised.
- Global Macro / CTAs. In early summer, we noted that CTAs had begun to crowd together in equity markets, where trends were looking strong, impairing their usefulness as a diversification tool. Many equity trends have weakened since, prompting managers to reduce their exposure. However, better diversified portfolios should encourage investors to revisit the segment. Many Global Macro funds have struggled with positioning in equity markets, as Europe first outperformed, then slipped after France’s elections before paring losses in September. In addition, many managers have crowded into currency and rate trades, leaving them vulnerable to a monetary policy shift in the USA. Funds employing a multi-asset approach to emerging markets remain attractive, given the ongoing economic improvement and relatively attractively priced securities. Overall, a Neutral stance in this segment.
Sources: SGPB, Bloomberg, 05/10/2017. Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest..