The progressive winding-down of accommodative monetary policies provides an opportunity for absolute performance strategies
At the latest Candriam annual Absolute Performance Seminar, the Chief Investment Officer for Alternative Investments Fabrice Cuchet and the Head of Long Short Equity César Zeitouni highlighted the advantages offered by absolute performance strategies in a market environment characterised by the progressive winding-down of accommodative monetary policies on both sides of the Atlantic.
Since 2008, markets have been heavily influenced by accommodative monetary policies adopted by central banks. Interest rates have consequently remained close to zero or even in negative territory, underpinning risky asset valuations and driving heavy capital flow towards illiquid assets and leading to very low risk perception. The gradual winding-down of these policies, should level the playing field and push investors to radically review their asset allocation strategies.
In the words of Fabrice Cuchet, “government bonds no longer meet the needs of investors. First, their yields are too low, while on the other hand, their traditional role of providing the best means to diversify a portfolio has now reached its limits with interest rates at zero. Expected investment returns in the event of a crisis in a fixed-income portfolio are currently very low. Against this backdrop, there is good news on two counts. The first is that rising interest-rate phases have historically been favourable for absolute performance investment. Second, less quantitative easing also potentially means higher volatility and greater dispersion and therefore more opportunities for dynamic investment management strategies”.
Resurgent market dispersion is positive for long short equity and equity market neutral strategies. There is a shift from a less-favourable risk environment for conviction-based investments, towards an environment which values economic models differences. An increase in rates should further boost these strategies by creating an environment less suited to refinancing distressed companies.
The context is also more favourable for global macro strategies and multi-strategies as, in addition to greater dispersion between regions and sectors, managers can seize upon arbitrage opportunities, which had otherwise disappeared with markets trending in parallel across the board.
César Zeitouni adds “the digitalisation theme is gathering pace and is now spreading to all segments of the economy. This shift is creating arbitrage opportunities between leading innovative companies and others which are lagging behind”.
Although the progressive winding-down of accommodative monetary policies is a challenge facing investors, it is also the source of numerous opportunities for dynamic conviction-based investment managers such as absolute performance investment funds. Investors have begun to anticipate this shift by reallocating towards absolute performance funds which have seen positive inflow since the beginning of the year.