The asset allocation intentions of the delegates correspond with their bearish expectations. By far the most popular asset class among them is long/short equities: 60% want to increase, while none of the delegates plan to reduce their allocation. Other strategies that aim to diversify away from beta exposure are also popular, such as multi-strategy, global macro and other absolute return funds.
Thierry Guerillot, who is responsible for fund selection at Myria Asset Management in Paris, has increased his exposure to absolute return to close to 25% of his model portfolio. Investing in long/short equity funds is one of the ways he tries to reduce directional exposure. However, he can’t always quite a good fund. “Sometimes we simply think we can do better, and buy a long-only fund which we then combine with short futures.”
Guerillot also likes to mix smart beta funds into his portfolio, but not indiscriminately. “There is definitely value in smart beta, but only in certain times and for certain factors. For example, in the volatatile markets we see today it’s a good time for low-volatility ETFs.”
Government bonds – the good old safe haven
But even in times of record-low and often even negative yields, some fund selectors still rely on the traditional safe havens. “We are overweight government bonds,” reveals Alessandro Viviani, a fund analyst at Old Mutual Wealth in Milan. “The flattening of the US yield curve after the Fed rate hike in December provided a big investment opportunity for us. And in general, you can still find yield in government bonds. Perhaps not so much in the core eurozone countries, but certainly in the periphery.”
In assessing the perspectives for government bonds, however, Viviani relies in a large part on his countryman and ECB-president, Mario Draghi, it seems. But he can be excused. He might be contrarian in his liking of government bonds, he’s far from alone in pinning his hopes to QE. However, most European investors believe QE will mainly drive the equity markets. “I’m sure the ECB will do anything possible to drive inflation up,” says Viviani. “So we are positive on the bond side. And at this moment, capital preservation is the most important objective for us.”
In that respect, government bonds have delivered optimal results so far this year. Government bonds beat all asset classes except for gold in the first two months of 2016. European govvies even generated a small positive return, while US government bonds are pretty much flat, regardless of their maturity. Absolute return funds, on the other hand, will have to see whether they can recoup their losses.