Franklin K2’s Brooks Ritchey has upped exposure to commodities as he believes recovery-focused companies will be the big winners from rising inflation and improved growth.
AA-rated Ritchey, who manages the Franklin K2 Alternatives Strategy, alongside David Saunders and Robert Christian, said has strongly allocated to commodities in the L/S bucket (35.63%) of the $1.7 billion fund.
‘We have been adding and will continue to add to the general commodity sensitive themes in the portfolio,’ he told Citywire Selector.
‘We have one fund manager we invest with called Impala. They had a great year last year, and have been doing well with metals and cyclical companies. These companies should continue to do well given the outlook for inflation and commodity growth.
Ritchey said many of the themes focused on involve commodity-recovery related ideas.
'Even if our managers aren’t directly buying crude oil futures or similar positions, we are playing two different themes: continued global growth and inflation. The primary impact of these themes is to be cautious on bonds.'
Ritchey said called on other managers to focus clearly on uncovering alpha drivers. ‘You can’t generate market neutral returns or alternative returns if there is no alpha.
'For example, the 2014/15 years were especially frustrating for hedge fund type strategies. We know in hindsight that one of the causes for this was excess liquidity being provided by the G3/G7 central banks and quantitative easing.
'That said, we saw a significant improvement in alpha during 2016 and the outlook remains bright,' he added.
Ritchey said the three main drivers of alpha over the last year have been interest rates, volatility and movements in foreign exchange and currencies and valuation.
‘With interest rates now trending higher those sectors with a lot of debt obviously don’t want rates to go up while those with low debt or a lot of cash like the tech sector, actually want interest rates to move higher because they receive higher interest income.
'The variation between winners versus laggards when rates move up is very supportive in generating long versus short alpha opportunities.'
Ritchey added that hedged strategies can generate low volatility gains by owning securities which benefit from changes in currency while implementing short hedges using securities which may be negatively impacted.
'There is the valuation differential effect created by the US tax bill, regulatory changes, and plans of further infrastructure spending. The impact of those Trump initiatives are actually being manifested quite differently across various sectors, in terms of valuations.’
Ritchey said the energy sector was previously cheap but once President Trump announced he would become more energy friendly that soon changed.
‘For example, the banking sector has been heavily regulated since the global financial crisis of 2008 and has lagged many other sectors during the post crisis recovery.
'Recently, Trump has said he would ease regulations on the banking sector and the relative performance of this sector has done well as a result.'
‘In short, the dawn of a new global interest rate cycle, recent changes in tax and regulatory policies, and the ongoing global coordinated growth cycle has benefitted long versus short hedged strategies.
'We feel this positive alpha environment shall continue for the foreseeable future,’ he added.