The past 18 months have seen market shocks such as Brexit and various general elections, however, M&G’s David Fishwick and Eric Lonergan have questioned why investors are waiting on tenterhooks for the next horrible event.
‘The world is booming yet nobody seems to realise it, if you look at corporate profits they are doing very well and we suspect that combinations of output, growth, and inflation that the world economies are producing is going to continue to be good,’ Fishwick told Citywire Selector.
The AA-rated duo, who run the M&G Episode Macro fund, said investors have gotten too familiar with market turbulence and therefore are waiting patiently for the next destructive event.
‘Everyone is waiting for the next horrible event. I said at the beginning of the year, what if the surprise of the year is that there is no surprise? People give you a long list of things that could go wrong. Mostly political events, things like China’s bubble bursting.
‘For the past four or five years, people have been given two or three of these things, people are well primed to expect something to go badly wrong.
'But there is a good chance that the landscape has been healed and everything is kind of okay, which never feels the same as a negative surprise,’ Fishwick said.
According to the duo, the world currently looks like an incredibly good place, but they said people are still looking for potholes to fall into.
'Valuations are good, you aren’t talking about people throwing street parties and shouting about how wonderful their lives are, but relative to peoples beliefs the world is looking good.
'Today doesn’t fit peoples models, the world isn’t supposed to be doing well and we are supposed to have problems and you can still see that in the pricing of assets.
'There are always things that can go wrong, but they are usually not the things you can think of. Our senses are that in twelve months’ time we will be sat here celebrating how well the world has done,' Fishwick said.
With the rise of systematic style strategies continuing to be prominent in the industry, Lonergan said the M&G Episode Macro fund would sit nicely alongside systematic strategies in an investment portfolio.
'They create a lot of opportunities, investor behaviour has become correlated through pseudoscientific risk models which are an interesting feature of markets. Things like the flash crash were generated by volatility and correlation.
'When you look at events like this it’s about people becoming seduced by price so they turn a blind eye to what is actually going on in the world because they are caught up in it, and systematic strategies can actually exaggerate that.'
Lonergan said if you do get exaggerated price moves which are associated with model behaviour then this could be a good thing for global macro strategies.
'This is fertile ground for us, what’s clever about what systematic funds do is that they have no emotional component because it should be computer driven,' he added.
Over the three years to the end of September 2017, the M&G Episode Macro fund returned 18.62% in euro terms. This compares with a 2.41% return by the average manager in the Alt Ucits Global Macro sector.