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New Year’s Resolutions: four selectors’ 2018 hopes and fears

Will top investors be focusing on more esoteric funds or finding old favourites in the year ahead?

Katy Gavelas

Allfunds Bank

Throughout 2017, headlines have been riddled with political tensions, and yet global growth is reaching new heights across the developed and emerging markets, with PMIs and earnings surprising on the upside.

As the New Year approaches, the main focus has revolved around central bank rhetoric and its talk of global QE tapering and interest rate hikes in the step towards ‘normalisation’. At the same time these institutions have had to navigate through markets that are still susceptible to macroeconomic shocks.

Going forward, fundamentally-driven managers should outperform, as bottom-up security selection is likely to add alpha in an environment that sees more dispersion across sectors and regions. These managers will also be able to move nimbly around styles they are most exposed to. With this in mind, fundamental equity long/short managers could be well-positioned for the year ahead, particularly those with a strong focus on idiosyncratic risk.

Furthermore, flexibility in the fixed income space is likely to help managers outperform their peers, if they can navigate through the anticipated interest rate hiking cycle that is expected to ripple through much of developed markets. Therefore, alternative, strategic and unconstrained bond funds are likely to do well in the next 12 months.

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Pablo Valdés Fernández

Orienta Capital

We are likely to stay invested with our top managers next year. However, as markets evolve, we will consider new managers and strategies that might complement our portfolios. In order to take advantage of a rising rate environment, we recommend our clients diversify their income strategy with senior loans. The higher yield and its floating component is likely to create a good risk/return profile for years to come. Here, we are invested with Blackstone and Arcano.

On the equity side, where valuations are stretched, we find attractive value-oriented strategies, where managers can express their convictions in concentrated portfolios and follow a benchmark-agnostic approach. Boutique managers such as Azvalor and Magallanes are among our top picks for their value strategies.

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Laurent Cattin

Gonet & Cie  

As a long-term investor, I tend to stick with the managers I trust and believe to be consistent. Next year will be no exception. However, due to the rich valuation of some asset classes, especially in fixed income, the risk-reward of most traditional vehicles has become highly asymmetric. In addition, a more normal period of volatility is likely to arrive soon.

With this in mind, one option is to use hedging instruments or create ‘all-weather’ portfolios using different building blocks. From an asset allocation standpoint, this approach makes sense. That said, regarding individual fund selection, it is increasingly important to use flexible and less directional strategies, such as long/short equity funds or true unconstrained fixed income managers. It is also key to avoid volatility-selling strategies, which are highly crowded and currently have a very low risk-reward ratio.

Another factor to monitor in 2018 is liquidity. At this stage of the cycle, and with interest rates that remain very low, the number of less liquid vehicles has increased. These products supposedly deliver a pick-up in yield for almost no additional risk.

However, I am not convinced the illiquidity premium of these strategies will systematically compensate for the embedded risk, as the latter is often underestimated. I have recently seen vehicles that are dangerous, as there was a significant mismatch between the fund and the underlying liquidity. I will steer clear of such products and continue to trust fund managers who genuinely put liquidity at the core of their investment process.

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Marietta Petropoulaki-Papasideri

Piraeus Asset Management

Within our fund of funds, we use an ESG score to asses both bond and equity holdings, where applicable, but it is a theme of growing importance. The transition to a lower carbon economy worldwide is leading global companies to reassess their corporate governance. ESG investing is therefore a key theme for 2018 as it can protect investors from reputational and operational risk.

For these reasons we are incorporating ESG standards into our investment strategies to help create resilient portfolios on a medium and long-term investment horizon. In the equity fund space, for example, we are focusing on impact funds. Thematic strategies addressing these issues will continue to attract more funds from investors next year as investors realise that such companies will perform better through the years.

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