Reduced market volatility is driving strong performances on the credit and global equity markets. Corporate bond yields have hit historic highs as investors increasingly seek out positive real returns.

But how long can low interest rates and low volatility be expected to last?

At this point, we are keeping our allocation virtually unchanged. We firmly believe that the combination of a US economic recovery and reasonable valuations will continue to provide solid fundamental foundations for our sector specialists.

In Europe, we are keeping up our research and analysis efforts, gradually adding more fund managers from the equity, multi-strategy and fixed income classes.

We also recently added Long/Short managers to the Energy and Utilities sectors, which are still underweight in most of the Long Only funds. Furthermore, price dispersion between renewable energies, oil and shale gas is at record levels. We reduced our Macro bucket slightly because the main investment ideas have already been played via our equities bucket.

LONG SHORT EQUITY

We are still positive on this strategy but prefer management approaches with a lower net bias and limited gross exposure, given the lack of macroeconomic visibility in general.

  • Europe seems more compelling in terms of valuation and central bank actions. We have increased allocation again.

 

GLOBAL MACRO

Adjustments of monetary policies through currencies and historical low levels of interest rates may act as tailwind for the strategy. We have increased our allocation.

 

QUANT STRATEGIES

Some specific Systematic strategies have been powerful contributors in recent months on the back of trends across oil, rates, FX among others. In the market-neutral quantitative arbitrage space, performances continue to be positive, albeit weaker than over the past couple of years. Trend followers benefit from the current environment. We have increased our allocation to CTAs.

 

FIXED INCOME ARBITRAGE

The turning point currently under way in terms of central bank policy has made market conditions unsupportive of this strategy.

  • Things will get more interesting once stimulus measures are actually cut back, with the resulting consequences on interest rates. Increasing volatility will be supportive for the strategy.

 

EMERGING MARKETS

Emerging markets continue to be a mixed bag

  • The transition towards economies driven by domestic demand is only just getting started, especially in China. Of course, the situation differs greatly from country to country. In some cases, key rates oversight is very effective, while other countries that are highly dependent on foreign-currency funding sources are stretched to the limit due to cash repatriation.
  • Although this contradictory situation can also be seen in equities, high-quality stock-picking can still be profitable.

We remain wary of the risk associated with countries such as Brazil, which are susceptible to major turbulences.

 

RISK ARBITRAGE - EVENT DRIVEN

  • While we believe that this strategy continues to make sense, its net long bias may put it at risk in cases of strong market disruptions
  • This being the case, we prefer to focus on US managers with a diversified foothold in both equity and credit deals, with a combination of hard and soft catalysts. We also notice an interesting development in “constructivism” vs. “activism” trades – and believe that this approach is likely to be more widely accepted in the case of European companies.

 

DISTRESSED

 

The distressed debt offer is still extremely limited for the time being. We do not see any immediate opportunities in this strategy.

 

LONG SHORT CREDIT & HIGH YIELD

 

Although the high-yield market is as expensive as ever, demand and flows remain substantial.

  • We are less active in this space, given the richness of the asset class but the recent collapse of US energy HY is a clear testimony of potential future opportunities



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