US tapering presents investment opportunities: William Blair

Fears of stability across the globe around tapering are creating significant investment opportunities in countries like India, Thailand, the Ukraine, Venezuela and Argentina, according to William Blair’s Head of Dynamic Allocation Strategies (DAS), Brian Singer.

On a visit to Australia to promote William Blair’s DAS to institutional investors last week, Mr Singer said geopolitical events do not tend to change the valuation of assets or the value of currencies.  “Risks are definitely out there, but the developments are creating opportunities,” he said. “These events significantly motivate prices away from or towards fundamental value.”

Mr Singer said William Blair’s DAS team assesses each individual geopolitical situation, to decide whether the opportunity is adequately compensating for the risk that is introduced. “What we are doing is taking some of the risk away from just being exposed to the market and adding risk that is uncorrelated to the currency,” he said. “India became our largest position when Raghuram Rajan became the Governor of the Reserve Bank of India in August 2013.”

India is still the William Blair DAS team’s largest position due to a significant interest rate differential and because the currency is cheap relative to its fundamental value. “It looks to be a great opportunity going forward, and a great diversifier for portfolios.”

Mr Singer said the first port of call for the William Blair DAS team in deciding to invest in equity markets, bond markets and currencies all over the world, is to determine fundamental value. “We look for prices that revert back to fundamental value over time,” he said. “Within the current geopolitically unstable environment, there are a lot of strategic negotiations and it is important to understand those negotiations and the behaviours of the players as that pushes prices around.“

On currencies, Mr Singer’s said the William Blair DAS team estimates the value of the Australian dollar at about $0.65-$0.70 to the US dollar. “So it’s a long way away from fundamental value,” he said. “We are short and we are short most of the commodity currencies for a number of reasons. First of all because we believe commodity super-cycles have led investors to push prices up above fundamental values and secondly because we see the opportunity for those prices to revert back to fundamental value as commodity prices come down.”

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Brian Singer

The Eurozone, which has been the very centre of political instability, is where growth is most likely to emerge in 2014 and, in terms of currency, the Indian Rupee will be the place to be, according to Brian Singer, Head of Dynamic Allocation Strategies at William Blair.

On a recent visit to Australia, Mr Singer said that the Eurozone is becoming increasingly more stable, which is conducive to growth. “There is more stability there now and there is likely to be more stability there in the future than the market appreciates and that’s all supportive of growth,” he said.

Mr Singer said William Blair’s Dynamic Allocation strategies are currently overweight Italy and Spain and has other exposures across the Eurozone, including the Dutch and German equity markets and very limited exposure in France. “Those are the primary exposures,” he said.  “The implementation comes through a combination of futures and ETFs.”

Still in Europe, on a sector basis, Mr Singer has a little bit of a leaning towards the financials and does not incur the exchange rate exposure. “We are actually short the Euro and Swiss franc as well,” he said. “We are doing that as a matter of saying we do want equities exposure but we don’t want exposure to the currency. Not only do we not want exposure to the currency, we do want to be short the currency.”

However, speaking of currencies, it’s a different story in Asia, where William Blair has recently taken a long position in the Indian rupee.

“The largest exposure we have in Asia is a long position in the Indian rupee,” Mr Singer said. “It’s not everybody’s cup of tea but it is cheaper now than since about 2007. The discrepancy between the Indian rupee and what we would say is its fundamental value increased to such a degree that we were more comfortable taking a position.”

In addition, Mr Singer said the interest rate differential in India began to move higher, creating a greater incentive to step into the currency. “When you are getting that type of carry in owning the Indian rupee on a forward basis and picking up that interest rate differential, it’s compelling,” he said.

Mr Singer discounted the panic that has occurred in the Indian rupee over the last couple of months as the market’s attempt to perceive what’s going on from the perspective of the experience of the 1998 Asian currency crisis.

“We simply don’t believe the environment is the same as that environment. We aren’t dealing with rates that are coming off, we aren’t dealing with exploding current account issues and challenged reserve situations,” he said. “The Indian current account deficit has been in place for years and the market has become aware of it this year – good for them, it provides us with an opportunity to focus on that and creates the opportunity.”

William Blair is currently short the Australian dollar.

William Blair launched an Australian and New Zealand presence, headed up by Australian executive, Alex Francois a year ago.

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Mr Singer, a leading expert on global macro-economics who visited Australia last week from William Blair’s head office in Chicago, said current geopolitical events give fewer people greater influence.

“This affects market prices and impacts the performance of portfolios,” he said.

To help navigate the turbulence between existing opportunities and ultimate performance, William Blair’s DAS team has devised Game Theory.

“Game Theory provides a framework for making sense of current geopolitical and macroeconomic developments,” Mr Singer said, “And for assessing why prices deviate from values to help determine if investment opportunities provide enough compensation for the risk involved.”

Mr Singer, a pioneer in advancing the active management of multi-asset and currency portfolios, said William Blair’s DAS team positions portfolios to benefit from or protect against potential displays of power.

“We seek short-term opportunities to modify the timing and magnitude of investment positions and benefit from the inevitable long-term movement of market prices toward fundamental values,” he said. “We then position the portfolio to take advantage of the opportunity or to eliminate the risk.”

While William Blair has used Game Theory informally in the past, the process has now been systematized and is an integral part of William Blair’s three-stage DAS investment process.

“We now employ Game Theory across our Macro Allocation Fund, DDA SICAV and private funds,” Mr Singer said.

William Blair has an Australian and New Zealand presence, headed up by Australian executive, Alex Francois.

“During my recent visit Down Under, Australian institutional investors showed keen interest in Game Theory,” Mr Singer said. “We are looking forward to working with them.”

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