The macro-economic environment is driving investors to batten down the hatches in an effort to preserve capital. Greg Branch, Partner and CIO at SCIO Capital details what this defensive stance means for investors.
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The macro-economic environment is driving investors to batten down the hatches in an effort to preserve capital. Greg Branch, Partner and CIO at SCIO Capital details what this defensive stance means for investors.
How have client needs and demands changed and what has your response been in terms of your service offering?
Most investors are licking their wounds after a disastrous 2022 which saw total returns fall by over 10% for both the S&P 500 and the US 10yr treasury… the first time this has occurred in over 150 years. Investors who relied on the inverse correlation between bonds and equities experienced over the prior two decades to hedge their portfolios were caught flat-footed when that relationship reversed. Not surprisingly these investors are now turning to capital preservation strategies like SCIO’s which have proven themselves time and time again an effective downside hedge.
Therefore, we have responded to this increased client demand by recently launching SCIO European Secured Credit Fund IV which offers investors access to SCIO’s award-winning European asset-based credit strategy via Euro, Sterling and US dollar share classes.
What is your outlook for the hedge fund space for the coming year and how is your firm best placed to support clients to navigate the environment?
Our expectation is that the “pain train” in capital markets will keep on rolling throughout most of 2023, driven by a weakening global economy and exacerbated by a pending US debt ceiling crisis as well as rising geopolitical risks.
Fortunately, the coming selloff will bring with it opportunities in the form of wider credit spreads and lower leverage, culminating in the best opportunity set in credit in well over a decade.
What are the primary challenges your firm and your clients are facing and what is critical to these being overcome?
While it appears likely that markets will get worse before they get better, the key question on investors’ minds should be “how much worse”?
To a large extent, this depends on how the Russian-Ukrainian conflict plays out in the months ahead. While our sincere hope is that a peaceful resolution can be negotiated over the coming months, we believe it unlikely given the America views China and Russia as an existential threat to its hegemony, and Russia views NATO expansion into Ukraine as an existential threat to its national security.
Asset managers are therefore well advised to factor this fat tail risk into their investment decisions over the months ahead.
Can you list three key learnings you are passing on to clients in the current environment?
Three key points investors should bear in mind in the year ahead would be:
Position Defensively – Portfolios should be positioned defensively given the numerous risks which are not yet being accurately reflected in asset prices. Invest in managers like SCIO who have a seasoned team and a long track record of providing downside protection throughout economic cycles. Also, decrease exposure to larger managers as bigger is not better in the fund world, nor does size imply safety (e.g., Credit Suisse, Wirecard, Vision Fund).
Reconsider What “Defensive” Means – The geopolitical and economic landscape has meaningfully changed as compared to the past two decades. Therefore, maintaining a traditional 60/40 portfolio and considering it hedged during a period of quantitative tightening is likely to prove a flawed strategy.
Be Nimble – The coming downturn will provide tremendous investment opportunities in the credit space in the months ahead. Smaller, more agile funds who can pivot quickly once credit assets reprice will significantly outperform larger funds.
Greg Branch, Partner and CIO at SCIO Capital
