Citywire AA-rated Fabrice Kremer is backing absolute return funds to bounce back after a torrid 2016 and is placing is focusing on long/short funds with a mean reversion bias.
Banque de Luxembourg’s Kremer currently has 47.07% of the BL Fund Selection 0-50 fund allocated to absolute return funds.
He told Citywire Selector that trend reversals in 2016 had hurt many of these strategies.
'Times have been difficult for several strategies especially in 2016, which was characterised by many major trend reversals in financial markets, interest rates, commodities, forex and two big equity sell-offs.
'This kind of environment is of course very challenging for strategies with a bias towards momentum. But all in all, we have not been disappointed by our selection of absolute return strategies over the last 18 months.'
By picking managers with diversified styles, exposures, and strategies, Kremer said the team has been able to mitigate the pain coming from their weakest strategies.
‘Investors need to keep something in mind: most absolute return strategies are cash-rich and their level of returns is highly dependent on how much their cash is yielding.
'With the climax in negative yields from 2015 to 2017, the absolute return space has faced a major headwind which we can expect to abate.'
Kremer said it is often hard to generate alpha when markets are rotating sharply.
‘It is easier to let winners run, even if they are overbought. Since the start of the year, there has been no sharp move for equity markets as a whole, but we have seen many waves of sector and style rotations driven by moves in the oil price or the US dollar.
‘The current environment is not as benign as it seems, especially for alpha providers compared to beta providers, notably ETFs. But we remain confident this is just a transition phase and that over the long run we will always be able to identify active managers able to substantially beat their benchmark.’
With a clear focus on absolute return strategies, Kremer said the maturing of the bull market has pushed the team to allocate more money to long/short equity managers with value or mean reversion bias.
'We are also more cautious about momentum,' he said. 'For this reason we also strongly underweight trend-following strategies even if we know we will need to jump in when markets enter a more bearish phase.
'When this cycle turns we can also expect good global macro managers to do well but it is certainly too early to make this call just yet,' Kremer added.
Over the three years to the end of June 2017, the BL Fund Selection 0-50 fund returned 11.3% in euro terms. This compares with a 0.8% sector average over the same time period.