The euphoric growth expectations that followed Donald Trump into the White House are hard to ignore but OFI Asset Management’s Frédéric Cohen is not so optimistic for the new US regime.
Cohen is increasingly concerned that not only will the Trump rally peter out but that America itself is at the end of its economic cycle. For these reasons the Paris-based fund selector and head of multi-strategy funds is aggressively repositioning his investments.
Taking a three-pronged approach, Cohen is limiting the impact of beta from the US market; capitalising on the pockets of growth which truly long-term investors can access; and hedging against future drawdowns.
‘We are not very bullish on the US, so we don’t want to have any beta there. In the current environment we would be very happy to short this market, so we are trying to find global long/short equity managers,’ he says.
Coming up short
Identifying managers who can reflect Cohen’s caution towards the US is harder than it would appear. However, he says James Clunie of UK-based asset manager Jupiter is a particularly strong addition to his absolute return holdings.
In the run-up to Trump’s inauguration Clunie spoke about shorting US stocks at a time of heightened investor expectations and moved 20% of his short book to US exposure in January – a move which Cohen welcomed.
‘It has been difficult to find people that don’t have a long bias, especially on a shorter-term basis. We found the Jupiter Global Absolute Return fund and James is very prudent at the moment, which we are happy with. He is not bullish on the US market,’ Cohen says.
Although Cohen is conscious of the US story running out of steam, he has kept one eye on managers who could capitalise on any sudden alpha swing.
Adrian Brass of UK-based boutique Majedie, is a case in point. The former Citywire AAA-rated manager, who ran several high-profile funds at Fidelity before switching companies in 2014, oversees the Majedie Asset Management US Equity fund.
‘It is very difficult for long-only US equity fund managers to outperform the market as there is no alpha. However, over the last few years, we have seen some managers move companies and develop strategies which can deliver strong performance if we have a recovery in alpha,’ Cohen says.
‘This could be due to the end of Fed-led QE or because of the normalisation of interest rates, which is why we recently invested in the Majedie fund, as we also know the manager from his time at Fidelity.
‘In this specific instance, we hedged the beta by shorting a future on the S&P 500, so we are only extracting the alpha from that fund manager. The idea is to find an investor who can deliver outperformance in any market,’ Cohen says.
Elsewhere, Cohen is building in some extra protection through his exposure to gold miners, where he has taken a long position via an ETF and paired it with a short on the US market using a future.
‘We all know central banks have put a lot of money in the market and there will be consequences over the medium or long-term, so a position in gold makes sense on a long-term basis. We started to build the position with an ETF which is hedged with another ETF on the US equity market.
‘Central banks are unlikely to give up their focus on addressing inflation as there isn’t any at the moment. Their aim is to reach 2% or even 1.5% but even that is not an adequate level for the long term.
‘Therefore, we expect some central banks will decide to generate much higher levels of inflation. At that time, there will be very few assets able to outperform and these positions will be hugely beneficial,’ Cohen says.
These comments originally appeared in the July edition of Citywire Selector magazine.