"If you’d launched this fund in 2005, you would have needed to use a lot more leverage. Now, however, we’ve got a better volatility backdrop and opportunity set in a more schizophrenic market,” says Bob Jolly (pictured), Head of Global Macro at Schroders.
In early October 2012, the firm launched the Schroder GAIA Global Macro fund, an UCITS-compliant vehicle managed internally by the Schroders Fixed Income Multi-sector team with Jolly at the helm. With significant structural macro imbalances generating more volatility and a rise in risk premiums, Schroders moved quickly to introduce the new fund, which has an 8 per cent volatility target and aims to generate annualised gross returns of 8 per cent over LIBOR.
“Due to market uncertainty there are some pretty attractive risk/reward trades available. It’s an alpha-rich environment,” comments Jolly.
Volatility provides opportunity. Strategically, Jolly and his team will aim to generate consistent returns to investors by taking a necessarily flexible approach when trading. This, says Jolly, is not a “buy and hold” environment. Market cycles are shorter and despite the obvious need “to have a long-term view of where you think things are headed, equally you need to have a mix of strategic insights in your portfolio to benefit from that view. We don’t want all our views to be tactical, all thematic, or strategic, we want to have a mix of all three.”
As a result, the fund employs diversification in investment style (systematic and discretionary), alpha source, and time horizon to achieve its objectives.
In terms of how Jolly and his team are playing the markets vis-à-vis global macro trends, the clear sentiment is that we are not yet in a bond bear market. Consequently, Jolly favours building long positions in Anglo-Saxon economies that have greater potential for further quantitative easing. The eurozone is trickier, given the disquiet from the Bundesbank over the ECB’s bond buying plan.
“The UK government has left us in an environment where the fiscal mess, the household mess etc means that its economy is going to be in the wringer for some time yet. In the US, it’s not too dissimilar a story, aside from the household sector which is the only bright spot. From that perspective, we’re trading both the US and UK on the long side, and German bunds on the short side.”
As to the kind of instruments being used to express these views, from a duration perspective, Jolly confirms that the fund has a steepening bias of 10s and 30s; that is US and UK 10-year and 30-year government bonds. This is based on a conviction that the one issue central banks are most paranoid about right now is a deflationary episode.
“You can’t steepen with 2s and 10s because they are essentially directional trades these days but you can with 10s and 30s. So you play for a steepening curve. We also used an opportunistic trade for a while by going long inflation in the US. We put that trade on in the early twos and took it off at 2.80 per cent,” says Jollly, noting that at 2.75 per cent it’s not a trade to consider right now.
On Asia, Jolly thinks the storm clouds are starting to gather in Australia. One potential alpha source over the medium-term is to go short the Australian dollar. There are a few reasons for why Jolly is bearish on the currency.
Firstly, some 80 per cent of Australia’s bond market is owned by foreign investors. If the situation arises where the tap for AUD is suddenly turned off, the resultant flight to safety could, says Jolly, “turn into a bit of a mess”.
Secondly, Australia’s biggest exports, commodities, aren’t as attractively priced. The big worry here is that export levels will potentially fall as countries like China undergo a structural shift in their economy to become more import-driven domestic consumers.
Thirdly, says Jolly, is the fact that Australia exports a lot of gas to Japan, whose contracts are linked to oil prices. The fact that shale gas has caused natural gas prices to plummet relative to oil means there’s a possibility that at some point “the Japanese won’t be happy with this arrangement and will look to renegotiate contracts. That’s horrible news if you’re a gas producer and you’re hoping to make good profits.”
When asked how he thinks the fund will generate consistent incremental returns to investors, Jolly answers: “By diversifying the alpha source, the style we employ, and the time horizons of investments within the portfolio.”