Investors usually want to own defensive-orientated macro strategies, but that trend is beginning to shift, M&G’s David Fishwick and Eric Lonergan have said.

In a year that has seen assets of the M&G Episode Macro fund swell from €70.1 million (£56 million) to €288.32 million (£258.72), the A-rated duo said investor perception of the sector has changed.

‘It’s beginning to change dramatically, if you have owned defensive strategies in the past you haven’t lost much money but you haven’t made any either – investors have missed out on returns.

'Investors are different today than what they were say two years ago,  we are saying exactly the same things but the response you get now is very different.

'The attitude we would get was one of: "This is interesting and you have a good long-term track record, but we are just not interested in this sort of fund right now".'

However, once bond yields dropped to zero, Fishwick said it has been hard for investors to keep making money.

'They had been seduced by what had worked for them in the previous phases where defensive bearish strategies had done well,' he said.

Short success

Lonergan said part of the reason the fund has done well is down to a number of specific ideas, such as the team’s short position (60.2%) in government bonds.

‘Most of what we have at the moment is working well, it’s not contrarian. It was contrarian to price when we put them on, but like Dave always says: "To make money you need people to come around to your point of view".

'We are short bonds, long US banks, long Asian equity, long Mexican peso and very short government bonds. You would struggle to find a portfolio as diverse as that as they are almost contradictory views.'

Surprising profits

Fishwick said another driver of performance has been the weakness of government debt and the rally in ‘cheap’ equities.

'We’ve done very well out of some mining equity and this calendar year we have also done well from Asian equity which had been in a doldrum for a long period of time.

'Underlying that is a Chinese and Asian growth theme which has fed through highly surprising positive corporate profits. There’s been a big shift between equity versus government debt and the currency side has been very fruitful for us.'

Fishwick highlighted the election of Donald Trump and the reaction of the currency market as an episode which bolstered returns for the fund.

'The noise around the Mexican peso was big for us, all around Trump and the wall. There was an idiosyncratic weakness in that currency and we were able to allocate a lot of capital to it and it has recovered, mainly since President Trump stopped talking about the wall.'

Over the three years to the end of July 2017* the M&G Episode Macro fund returned 17.20% in euro terms. This compares with the average manager in the global macro sector, which returned 2.95% over the same time period.

*Data taken from Citywire Discovery from the period July 2014-2017.