Michael Spinks, portfolio manager of the Investec Diversified Growth Fund, discusses three multi-asset portfolio ideas that the team classes as ‘uncorrelated’ – these trades have a variable relationship with economic growth dynamics and overall risk appetite, with performance that is generally unrelated to real economic and corporate earnings growth
"As we enter the seventh year of this equity bull market and near the end of the 30+ year bond bull market, some investors are prophesising the end of the investment return-making world as we know it. While it seems hard to disagree that the days of low-hanging investment fruit are behind us, we believe that if investors rummage deep enough and look around in different places, opportunities still exist", point out Spinks.
‘Uncorrelated’ return sources are one area of particular focus for Investec. These are investment opportunities that have a variable relationship with economic growth dynamics and overall risk appetite, so that performance is generally unrelated to real economic and corporate earnings growth. Not reliant on a strong market direction to be successful, they generate a different type of return stream compared to long-only holdings in equities and government bonds, providing possible diversification benefits to a portfolio. Relative value positions play a role here, constructed across equities, government bonds and currencies.
Whilst not easy to find, a broad opportunity set helps, as does a repeatable and structured idea generation process. Below we outline three ‘uncorrelated’ portfolio ideas to illustrate this view.
1) Taiwanese vs Singaporean equities
Our internal analysis ranked the Taiwanese stock market highly, but was much less positive about Singapore. "Taiwan, we concluded, offered quality growth potential at a reasonable valuation with supportive investor positioning and earnings revisions. Singapore, on the other hand, had poor fundamentals and a lack of earnings revisions, which outweighed the attractive valuations on offer", said Investec manager.
Additionally, the respective sector composition was attractive as the Taiwan overweight to technology provided exposure to a US recovery and was less exposed to potentially higher US interest rates than other emerging markets. Singapore was characterised by a heavy bias towards banks with relatively high exposure to Chinese loans and a weakening domestic property sector. Therefore, in aggregate, this position offered exposure to the US and European growth cycles while hedging against further China weakness.
2) Hungarian forint vs Polish zloty
Although Investec was positive about the prospects of the Polish economy over the medium term, it had shorter-term concerns due to falling levels of inflation and the prospect of interest rate cuts in reaction to weaker industrial activity. Exposure to Russia and Ukraine also put pressure on growth. Hungary, on the other hand, offered strong economic growth, inflation that was picking up from a low base, and a stable interest rate environment. This position was a way to take advantage of diverging monetary policy and growth outlooks between the two countries, with the added advantage of the Hungarian forint being relatively cheaper than the Polish zloty.
3) Long Australia 10 year government bonds vs US 10 year government bonds
This idea was based on the view that divergent monetary policy and economic fundamental data would drive interest rates in Australia and the US in opposing directions. This trend had already been occurring for some time but, in our view, would continue to become more apparent in the period ahead as the US starts to gradually remove policy accommodation and Australia looks to provide more easing as it adjusts downwards to a once in a life-time terms-of-trade boom.