Interest rates and bond yields are both at historic lows, to the point that one may think that there is no scope for further reductions. But Harald Preissler, Chief Investment Officer, Chief Economist, and Head of Asset Management at the Swiss management company, Bantleon, does not think so: he believes that low asset yields will remain for a while, "they will remain low over the next five years, and will not rise too high," he explained during this interview with Funds Society, and he argues that there may still be scope for further reductions in the coming months.
"With the economic downturn in Europe, in 2015 we could see yields even lower than the current ones," he says; although he acknowledges that the margin is not large. Preissler explains that bonds need not again have high returns, or undergo high volatility, in order to generate returns in the portfolios, but they are able to generate alpha if yields move in around 1% -2%.
Their management is based primarily on analyzing the economic cycle: whereas, in periods of greater strength, they opt for high yield, credit, emerging market debt, or convertibles, if the situation worsens, as has happened this year, they go back to gaining exposure to public debt, which currently represents most of the portfolios of the Bantleon Opportunities funds. It’s currently overweight in German government bonds while recognizing that if the situation improves in 2015, as expected, they will opt more heavily towards credit and high yield debt. These strategies, which can invest in European bonds, currently avoid peripheral debt because they want highly liquid assets, although it does have this asset in other portfolios.
They have two sources for profitability: duration management and the incorporation, or not, of equity. As for duration, it now stands at about four years (Opportunities funds’ conservative strategy can range from 0 to 7 and the aggressive ones between 0 and 9). "If the situation becomes complicated, we are long in duration, in order to benefit from the transfer of capital from risky assets to safer assets"; and if the situation changes, they do the opposite.
The weak economic environment not only explains their opting for German government bonds, but also their current lack of exposure to equities in flexible strategies which allow it. "The economic data is weak and the technical data indicates caution, so we prefer to be out of the stock market," he explains, although if the situation stabilizes they will invest once more. The funds include this asset in a binary way through DAX futures (i.e. they are either invested, or not invested): for the conservative strategy they have either 0% or 20%, and for the aggressive one, either nothing or 40%.
This combination can be explained by the desire to have, at least, one source of alpha in the portfolio. "When the situation improves and fixed income yields go up, should there be exposure only to bonds, there would be no source of alpha, unless they opt for negative duration, which is somewhat more complicated from the technical point of view than exposure to the stock market. In that case, the stock market provides a source of alpha."
QE towards late 2015?
Preissler envisions a difficult economic outlook for Europe, with growth declining but without recession, although he believes that, with the help of a weaker euro, the situation will improve next year. Should the economy fail to recover, however, he believes that the ECB could act with a real QE. For now, it would suffice with a QE in the private market, and Germany would stop at that, but should the situation worsen, purchases of public debt will come at the end of next year or in early 2016. "In the end, Draghi has no other means of improving things than to buy government debt, there is not much else he can do if another period of economic weakness comes along," he says.
European banks will not help the recovery because, in his opinion, there is no demand for credit and companies have cash to undertake investments outside Europe; therefore approved stress tests do not involve a change in the situation.
Across the Atlantic, the Fed could start raising rates in the second quarter of next year and the management company is positioned for that movement, although they rule out sharp rises which may endanger a recovery which is still weak, and taking into account the real estate industry’s sensitivity to those increases. "US cannot afford it," he says.
Opportunities in emerging markets
For the Bantleon Opportunities strategy, the manager believes that there is value in other fixed income assets in addition to European public debt. In their multi-asset strategy, Bantleon Family and Friends, they have, also with a duration of four years in debt assets, positions in credit, although he has cut down somewhat in high yield. As well as in European government debt, although peripheral this time, including Spanish debt, these positions were built in early 2012 and are still overweight.
15% is in equities, some US but especially in emerging countries, in which it’s overweight, as he considers that the weakness of last year, which resulted from the end of QE in the US, has faded and the situation will improve. It also has 7% in gold as a hedge against potential crises.
Bantleon manages over 10 billion Euros. Capital Strategies Partners, specializing in mutual funds brokerage, represents Bantleon in Latin America and Spain.