One of the main objectives of active asset managers is that their portfolio is able to offer attractive returns even in times of high market volatility, such as the current environment. This investment approach was discussed by Mike Riddell Portfolio Manager, Allianz Global Investors, and Jack Norris, Associate Portfolio Manager, Allianz Global Investors, during the latest webcast organised by the manager, which addressed the Allianz Strategic Bond.
Allianz Global Investors explains that Allianz Strategic Bond is an active strategy and has an unconstrained approach to managing a portfolio designed to behave as a bond fund should during a market crisis, seeking to deliver attractive absolute returns during periods of intense volatility while providing a return stream uncorrelated to equities. Here are the key takeaways from the event
“Allianz Strategic Bond is an actively managed fixed-income strategy designed to deliver attractive returns in any market environment. The Strategy has consistently outperformed its benchmark since its inception in 2016 and aims to target three objectives. First, it’s outperformed the Bloomberg Barclays Global Aggregate Index (hedged to US dollars) over a three-year horizon by pursuing four potential sources of alpha – rates, credit, inflation and currency. Second, it acts as a portfolio diversifier, targeting a correlation (max +0.4) with global equities (MSCI World Index) over a three- year horizon. And finally, It is asymmetric. It means that it delivers an asymmetric return profile by pursuing opportunities that have the potential to capture greater upside than downside”, explain Mike Riddell and Jack Norris.
One of its main features is its flexibility, which allows the portfolio to be repositioned according to market conditions. Mike Riddell and Jack Norris explain that at the beginning of the year, the Strategy was positioned for rising inflation and lower rates amid strong economic momentum globally. “However, we grew increasingly concerned at the end of January and beginning of February that the coronavirus posed a material risk to the global economy and our investment thesis. In response to these concerns, we began to position the portfolio for a more “risk-off” environment, becoming more cautious toward credit, as we expected spreads to widen, inflation to fall and volatility to rise”, they claim.
Managers acknowledge that as market conditions worsened in March, their credit and currency positions contributed favorably to the strategy. “Later in the month, as the Federal Reserve (Fed), US government and policymakers in Europe and Asia launched unprecedented responses to the crisis, we aggressively shifted the Strategy to a more “risk-on” posture (outside of our currency exposure) to benefit from a potential economic recovery in the second half of 2020 (as of April 30)”, they add.
Another key element in Allianz GI’s bond strategy is liquidity. Managers recognize that liquidity is an element that has been of great concern to them during this market environment. “The International Monetary Fund’s (IMF) recent Global Financial Stability Report (October 2019) highlighted heightened risk for fixed income fund liquidity, estimating that half of the world’s high-yield funds do not have enough liquidity to meet redemptions in a stressed environment. As credit spreads have narrowed from recent peaks, we have seen some normalization in liquidity. However, we believe liquidity remains fragile in the current environment, and a resumption of fears could spark another liquidity event. Within our Strategies, liquidity remains a critical risk-management component, and we assess liquidity on an issue-by-issue basis to ensure we can meet client redemptions and change our positioning”, Mike Riddell and Jack Norris comment.
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