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Duration protection is ‘broken’, says Nordea star Vorm

Duration protection is ‘broken’, says Nordea star Vorm

Duration is no longer working for multi-asset managers in the way it once did due to low bond yields and market volatility, according to Citywire A-rated Claus Vorm.

In an investor update, Vorm, who co-runs several multi-asset and multi-strategy funds at Nordea, said investors cannot depend on duration to act as a counterbalance to equity beta and need to look for alternative solutions other than making accurate macro calls.

‘Many multi-asset strategies have struggled during the market volatility this year because managers are failing to address this new fixed income paradigm and cannot identify truly defensive (anti-beta) assets,’ Vorm said.

‘Many managers look to de-risk a portfolio and limit drawdowns either by buying expensive protection overlays, or try to time the market. This approach leads to inconsistency and proved to be insufficient for most diversified growth strategies during the severe drawdown and subsequent rebound in Q1.’

Vorm added the ‘safe havens’ offered by government bond markets brought sizable drawdown risks and recommend looking at low risk equities instead of high-quality government bonds.

He has 27.06% of the Nordea 1 Stable Return fund, which he manages with Kurt Kongsted and Asbjørn Trolle Hansen, devoted to government bonds. This is while developed market equities make up 45.47% of the fund.

‘Low-risk stocks, those with robust fundamentals and more resilient earnings, tend to behave much better than overall global equities during negative market periods – as witnessed during the global growth scare at the beginning of this year,’ he said.

‘This outperformance can help protect a portfolio and compensate for the lower protection offered by duration. For example, stocks such as Verizon and Infosys rose by 7% in January, in a month where global equity markets plunged more than 10%.’

Fixed income alternatives

Away from equities, Vorm said investors should consider covered bonds if they wish to stay in the fixed income space, as it is an area which is currently overlooked.

‘This market offers a similar level of safety as sovereign debt, but with an attractive yield pick-up. While European covered bonds are benefitting from the evolving banking and insurance regulation frameworks, it remains an inefficient market able to be exploited by experienced investors in this space,’ he said.

Vorm said that investors may seek out alternative assets as traditional asset classes such as infrastructure, private equity and real estate. However, Vorm said they suffer from illiquidity.

‘Efficient diversification is not simply about piling a number of asset classes, but rather the identification of a select number of truly uncorrelated positions able to deliver for investors through all market environments.’

The Nordea 1 - Stable Return fund returned 22.6% in euro terms over the three years to the end of March 2016. The average manager in the Absolute Return EUR sector returned 7.3% over the same timeframe.

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