Lars Jaeger

GAM Investments yesterday announced the win of a new Australian mandate for its GAM Systematic Alternative Risk Premia strategy. AMP Capital, one of Australia and New Zealand’s leading specialist wealth management companies, plans to make an initial investment of AUD 135 million in a mandate that will manage a diversified portfolio of risk premia.

GAM Systematic’s alternative risk premia portfolios typically target around 15 risk premia strategies across the style categories of value, momentum and carry. The team, led by Dr. Lars Jaeger, uses a disciplined research process to design, systematically implement and trade the various risk premia. The team will run the segregated mandate with a 10% volatility.

Lars Jaeger, head of alternative risk premia, said: “Our investment strategy has the potential to generate performance patterns which so far have largely remained uncaptured, or accessible only to the most sophisticated hedge fund managers. The team at GAM has more than 13 years’ experience in building and executing alternative risk premia strategies. In our investment process, we allocate capital across our portfolio based on each individual component’s expected drawdown, rather than based on volatility. Overall this gives us a more stable portfolio and one that is more protected in extreme market conditions.”

Celine Kabashima, portfolio manager at AMP Capital, said: “The strategy plays an important part in our absolute return program by providing our portfolios with diversification benefits against traditional asset classes and attractive risk-adjusted returns in a liquid and cost-efficient manner. The strategy acts as a complement to our existing suite of absolute return and risk premia strategies. It also offers a solution with a higher volatility profile that meets the objectives of our portfolios.”

Rossen Djounov, GAM’s head of Asia, added: “Australia is a key region for GAM, where we are continuing to grow. We now manage AUD 5.2 billion for Australian clients, who benefit from our knowledge and experience in alternative fixed income, equities and quantitative strategies. We are committed to the Australian market and see significant potential to introduce products to the region to help investors reach their investment aspirations.”

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Lars Jaeger

AMP Capital has awarded an initial $135 million risk-premia mandate to GAM Investments, one of the world’s leading independent, pure-play investment managers.

This mandate is for the GAM systematic alternative risk premia portfolios which typically target around 15 risk premia strategies across the style categories of value, momentum and carry.

The GAM team, led by Dr. Lars Jaeger, uses a disciplined research process to design, systematically implement and trade the various risk premia. The team will run a new higher volatility version of the same strategy, which AMP Capital will seed.

Celine Kabashima, Portfolio Manager at AMP Capital said: “GAM Systematic Alternative Risk Premia plays an important part of our absolute return program by providing our portfolios with diversification benefits against traditional asset classes and attractive risk-adjusted returns in a liquid and cost-efficient manner.

“The strategy acts as a complement to our existing suite of absolute return and risk premia strategies. It also offers a solution with a higher volatility profile that meets the objectives of our portfolios.”

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GAM hired Alex Zaika as managing director Australia, based in Sydney. Alex will report to Rossen Djounov, managing director, head of Asia, based in Hong Kong. He will build a team of dedicated professionals for the Australian market, enhancing GAM’s local support infrastructure and servicing capabilities to further develop and deepen relationships with Australian clients.

Alex joins GAM on July 23 from BlackRock. He has over 20 years’ experience in Australian financial services covering institutional, wholesale and retail market segments across derivatives, asset management and investment platforms. Prior to BlackRock, he has held various senior positions at Barclays Capital and Macquarie Bank across both institutional and retail segments.

Rossen Djounov said: “The strengthening of our distribution team in Australia underlines our commitment to provide the best service to our clients, meeting their needs in the ever-changing market environment. I am very excited to welcome Alex to the team.”

Having already been active in the alternative risk premia space last year, GAM has further plans to expand its local offering for Australian clients with new and existing strategies.

As part of the plans to expand in Australia, over an extended period GAM will transition out of its 14-year third-party marketing agreement with Sydney-based Shed Enterprises.

Tim Rainsford, group head of sales and distribution, said: “I would like to thank Shed, led by Sheridan Lee, for their great contribution over many years in helping GAM build a firm foundation for its Australian business. Australia is a very important and growing market for GAM, and the decision to expand our presence here is a natural consequence of our desire to be closer to our clients. Having a local team will enable GAM to better serve our clients’ needs and further expand our footprint in Australia, where we have already seen significant success marketing our absolute return bond and alternative risk premia strategies.”

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He adds:

A positive in this situation may be that many emerging markets economies are developing consumption-based economies that will insulate them from the worst effect of protectionism.

Nevertheless, many stocks have already been discounted in the expectation of trouble ahead.

In 2016, both the Obama Administration and the European Union put tariffs on basic steel product imports from China. Last year, Brazil imposed a tariff and a quota on US ethanol imports. And on it goes.

This is a long-running and complicated global situation that risks becoming a quagmire. It leads to very complicated discussions about local costs, local content and where you draw the line between legitimate trade and state subsidised trade.

The World Trade Organisation has not made any progress with its trade liberalisation agenda since the Doha Development Round, which was launched in 2001 and eventually broke down in 2008.

When it comes to investing in emerging markets, an economy’s percentage of external trade to total GDP is key to its sensitivity to this issue. This is often greater than at first perceived, as value chains and international supply chains complicate the picture.

Nonetheless, in general terms, the most exposed emerging market economies would be China, Korea and Mexico.

The impact on equity markets often depends on “what’s already discounted” in the price. Investors are already discounting a fair degree of trouble in such stocks as Korean auto plays Hyundai and Kia, steel plays such as Posco, and Mexican consumer staples with big US franchises such as Gruma.

But something to keep in mind when investing in emerging markets is that issues of corruption, governance, transparency and protectionism are more often encountered than when investing in developed markets.

The issue is whether that discount is widening more or contracting, as the probability of further protectionism increases or abates.

In addition, there is a question of the degree to which a country’s domestic policy reforms may materially influence its vulnerability to protectionism. A move towards a greater domestic demand reforms versus the old “Asian Tiger” export model is a plus.

India and China both fall into this category. Both have material and strong government-backed programs to enhance the pivot away from a primarily export based model.

Investing alongside these reform programmes offers an investor some relative downside protection.

For example, there are three or four excellent Chinese plays that are participating in the country’s environmental reforms. Companies such as the environmental management group China Everbright International are regularly in and out of our portfolio.

In addition, hopes are high that Saudi Arabia’s Saudi 2030 Vision will make a difference. The country, which is bidding for inclusion in the MSCI Emerging Markets Index, is looking at diversification into high technology.

One notable exception is Russia, which has failed to move away from hydrocarbons to a high value-added diversified economy.

Is the current situation a forerunner to broader trade barriers going up? I think we need to wait and see. NAFTA may fall to the politics. Watch out for Brexit and the new trade deal the UK will have to negotiate with the EU.

And if the Chinese are going to try and deleverage their excess credit bubble, it will lead to lower domestic demand and excess product for export. China will cut industrial production but it won’t happen until 2019/20. There is a risk of dumping and of retaliation.

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Tim Haywood

With expectations of rising interest rates in most major markets, bond funds with the longest dated bonds are looking increasingly risky.

In fact, according to one leading global fixed income manager, Tim Haywood, long-only investors may be better off in equities, especially after the recent cheapening. For investors with more latitude, a fully unconstrained fixed income strategy incorporating shorts as well as selected longs has increasing appeal.

Mr Haywood is an investment director and lead manager of the GAM Investments Absolute Return Bond Fund (ARBF), based in London. He made his comments ahead of his next scheduled trip to visit Australian clients in March. The ARBF has a long track record of producing solidly positive returns in markets when interest rates are rising, as well as making money when rates are falling.

“The bond market is under pressure from so many angles that you need the capability to take advantages of all opportunities,” he says.

Beyond being short duration, these opportunities include convertible bonds with equity protection, selected investment grade credit and high yield credit matched with credit index protection, and foreign exchange overlay with effective stop losses.

“Equities have done pretty well, although some markets had become fully priced; the recent declines are a healthy correction, as of 6th February, on the assumption that the growth and optimism continue. I may be one of the few fund managers in the world who has been promoting to those who can only buy securities, to buy something else, as opposed to being permanently optimistic for the asset class I represent,” Mr Haywood says.

Government bonds remain expensive, yet intermittent rallies will be too lucrative to ignore, he says. Traditional corporate bonds have their best days behind them, even if most corporations are thriving.

GAM has identified eight key problems with the bond markets:

1. Headline inflation is rising in most parts of the world. GAM is predicting that wage inflation will creep higher.

2. The starting level of yields is important for the period of measurement. For instance, the worst-performing country in fixed interest last year was Germany, even though that economy is thriving. The problem is Germany started from a position of negative yields at the end of the previous year. When adjusted for future inflation, the starting yields generally look even worse.

3. Emergency low interest rate policies are being rowed back. The US Federal Reserve is likely to hike rates and more officials in Europe are pressing for a return to “normality” of modestly positive deposit rates, Mr Haywood says. “It’s important to get to that point before the next recession.”

4. The big bond-buying programs, under Quantitative Easing (QE), are coming to an end. “The main one for us is Europe,” Mr Haywood says. “For every year of the QE’s operation in Europe, they have bought seven years of net production of government bonds. It’s really been like a big vacuum cleaner.”

The answer to these first four problems, GAM believes, is to be short duration in its unconstrained fixed income fund and portfolios.

5. The difference between long-dated bonds and short-dated securities is very “skinny”. In the US, for instance, the difference last week between two-year bonds and 10-year bonds, for 2020, is only 15bps. “You are not getting paid to take more interest rate risk,” Mr Haywood says. “No-one is satisfied that the bonds they are buying are pay high income or will perform brilliantly in an equity collapse. People have to do new and interesting, sometimes dangerous, things to boost their income.”

6. A further challenge for bond funds, like GAM’s, Mr Haywood admits, is that credit spreads on traditional bonds have become tight, making it more difficult to exploit credit as most have successfully done for the past five years. The all-in yield for new debt is very low, so lots of companies are issuing long dated bonds, often to finance M&A activity or share buy- backs. “This may be a treasurer’s dream, but the flip side of that is a fund manager’s headache,” Mr Haywood says.

7. For most of the last 12 months, until February, there has been very little volatility in financial markets, as bonds and equities rose. Passively managed long-only investments have looked like a smart idea, Mr Haywood says. When those market prices fall, fully-invested long-only passive funds don’t seem like such an obvious choice. “In January, for the first time in a couple of years, many hedge fund styles made money.” For absolute return funds, such as the ARBF, January was also a noticeably good month across the peer group. GAM took the opportunity to increase protection via buying options. In early February, those who shorted volatility seem to be suffering.

8. Finally, there’s the equities story. The spectre of rising interest rates finally hit home in the US since last Friday – and Australia this week – with the AS30 index coming off about 5 per cent. While this may probably prove be only a temporary correction, triggered by the impervious march higher of bond yields. “Volatility has woken up, asset prices are generally declining, which may eventually hurt certain risk parity offerings. The US dollar decline has paused, especially versus the Aussie dollar: it’s become very different in some corners,” Mr Haywood says. “But away from screens, key forces remain robust, and for that reason, equities may yet show good returns in 2018.”

In late January, the ARBF sold four of its most equity-sensitive securities and moved to a more balanced portfolio. It also increased its protection against a drop in equity markets and took the total duration of the portfolio, which had been “pretty negative”, back to zero.

Mr Haywood says that absolute return bond funds represent a more appropriate way to now achieve the main attributes normally achieved by buying bonds, which are to preserve capital, provide safety in times of stress, provide for a reliable income stream and to provide uncorrelated returns compared with equities and property.

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Owen has spent over 12 years in investment management, mainly within the macro strategy space. He joins from Soros Fund Management where he was a portfolio manager. He will be based in London.

Tim Haywood, investment director and business unit head fixed income, said: “Owen joins with considerable macro strategy experience spanning more than a decade – he will further strengthen our proposition regarding theme generation and cross asset class positioning. Owen’s appointment underlines our dedication to active asset management and to meeting, consistently, the aspirations of our clients. We welcome him to GAM. ”

Owen joins GAM today.

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GAM Systematic’s alternative risk premia portfolios typically target around 15 risk premia strategies across the style categories of value, momentum and carry. The team uses a disciplined research process to design, systematically implement and trade the various risk premia.

Anthony Lawler, co-head of GAM Systematic, said: “We see continued strong interest in our product offering managed by GAM’s alternative risk premia team led by Lars Jaeger. Our highly disciplined research approach, honed over many years, focuses on designing well-structured risk premia with a focus on low cost implementation. GAM Systematic brings solutions to the table that are uncorrelated to the global bond and equity markets over the cycle, and that is clearly something that our clients seek in today’s environment.”

Lars Jaeger, head of alternative risk premia, said: “We are honoured to be selected by CommInsure for this mandate. With 13 years’ experience in alternative risk premia design, implementation and trading, our team has created a portfolio of strategies and styles that shows high stability in very different market environments. We utilise in-house developed expected drawdown-based portfolio optimisation methods to manage risk, in order to reconcile our clients’ return objectives with their desire for capital protection.”

Rossen Djounov, GAM’s head of Asia, added: “Australia is a very important region for GAM and we are glad to see it grow both in terms of assets we manage for local clients as well as the further diversification of our product offering. With this new mandate, GAM now manages over AUD 4 billion for Australian clients, who benefit from our expertise in absolute return, traditional and systematic  investment strategies. We remain committed to the Australian market and continue to build long-term partnerships with our clients here.”

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At the same time, GAM launches GAM Systematic, a new investment platform dedicated to systematic products and solutions across liquid alternatives and long-only traditional asset classes including equities, debt and multi asset. Cantab will form the cornerstone of GAM Systematic.

By moving into the growing segment of scalable systematic investing, GAM takes an important step to deliver on its long-term objective to expand and diversify its active asset management business. Leading systematic strategies are attracting substantial allocations from investors globally due to their compelling returns and their rigorous, disciplined investment processes.

GAM Systematic will complement GAM’s successful active discretionary investment offering. It will also serve as the Group’s innovation hub for the development of new technologies, investment ideas and approaches for systematic strategies and products.

GAM is the industry’s third-biggest provider of liquid alternative UCITS funds, both in terms of assets and number of products, and will promote the new systematic products through its distribution team of more than 80 relationship managers serving institutional and intermediary clients globally.

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