A Chinese proverb says, “The man without thought for the future will surely have trouble close at hand.”
So a prudent investor will always think about the risk of a black swan event that can dent his desired returns.
To cope with the uncertainties of investment, Standard Life Investments has come up with a strategy, in fact 35 of them, which it calls “Global Absolute Return Strategies”.
The investment approach is to invest in equities, bonds, foreign currencies and commodities, with a special focus on the interconnection among these strategies to protect investors in case of a global crash.
Running the biggest macro fund in Europe, with US$6.3 billion in assets, Standard Life aims to generate a return of cash plus 5 percent, while taking only a quarter to half of the risk of a traditional equities fund.
Since establishing the fund in 2006, the firm was able to achieve an average 8.8 percent return, the worst year being 2008, when it was down 6 percent, compared with a global equities fund return of minus 25 percent.
So far this year, the fund is up 5 percent.
“Unlike hedge funds, we are not trying to make 30 percent but to avoid volatility,” Standard Life investment director Roger Sadewsky said.
“We are longer-term investors. When we make investments, we don’t know when the returns will happen, but we are happy to take three years.”
With a medium-term view, the fund bought into European shares in October when other investors were worried about the International Monetary Fund’s weak forecast for the global outlook.
As it turned out, that was the bottom of the market. European shares are up 20 per cent since.
Sadewsky said: “A lot of investors only have a couple of strategies. We have 35 strategies.
“Maybe on seven or eight we were too early. As long as other things are working, it is a balanced portfolio.”
His strategies include shorting the Canadian dollar, buying Australian corporate bonds and buying Japanese equities while shorting Korean equities, to name a few.
When Sadewsky considers a new strategy, he needs to know what it does to the overall portfolio.
He said: “If we have high-yield bonds and we buy more Chinese shares, it is not diversified, because they have similar risks.
“But if we have some interest-rate positions, and someone says, ‘Let’s buy some Chinese A shares.’ That makes sense, because we have risk diversification.”
Sadewsky says this investment approach is better than those of most fund managers, many of whom are confident people who will tell you exactly what is going to happen.
But in order to have positive returns, they should get the right mix of assets. If their ideas do not work, they will have to sell when the market doesn’t go in the expected direction.
The key is “balanced”, because no one could have anticipated a 40 per cent collapse in the oil price, a yield of close to zero on German bonds and the other shocks that we experienced last year.
To build a balanced portfolio, Standard Life sets up parameters and make sure there is no more than 40 percent in any asset class, with a cap on exposure to a specific country.
Sadewsky found this approach is getting more attention in Asia, especially among aging investors.
“People get older, and older people put money in cash,” he said.
“The problem is we live longer, hopefully, and to keep your lifestyle, you need to keep making returns.”
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