Baptism of fire sees UBS Global Allocation manager Andreas Koester deliver top-quartile returns through sharp market correction
In terms of timing, UBS could not have chosen a more challenging period to test the skill and process of its Global Allocation UK fund manager Andreas Koester.
Launched in November 2007, UBS Global Allocation was unveiled just ahead one of the sharpest market corrections in living memory.
But after negotiating the severe downturn and subsequent rebound, Koester has been able to deliver top-quartile returns against IMA Balanced Managed peers.
More importantly, UBS Global Allocation has achieved a 6.5% return from inception to 28 February, compared to a fall of 2.8% for the sector, according to Lipper. Over one year the fund sits top decile.
What have been the key drivers of fund performance?
Markets started to become cheap in the summer of 2008, but there was a reason for this. So while valuation was so cheap, all the other indicators, including fund manager positioning and inflows, clearly showed us there was a lot of stress in the market. So we were holding back with risk assets.
Around March 2009 you could see a switch in earnings and economic releases. Because expectations were so low, it was quite easy for companies and the economic numbers to surprise on the upside. In addition fund managers started to re-position their portfolios.
The combination of valuations, plus a positive framework for risk assets, led to a very strong performance of the portfolio because we have been overweight risk assets.
Obviously you can argue about risk assets per se, because everything was cheap.
At this stage you could basically hold risk assets of whatever nature – so we held an overweight position in high yield, as well as in investment grade and equities. We were underweight government bonds.
Then as the year progressed, especially on the high-yield side, the spreads came in quite aggressively, which led us to take profit after very strong returns. We still believe there is more to go for in equities and investment grade corporates, which is what we hold at the moment.
We still have a high allocation to equities and investment grade corporates and we are currently underweight in government bonds and neutral in high yield.
What shifts have you made to holdings in recent months?
The changes have mostly been on the currency side. We have been in favour of the dollar since the end of September last year. The dollar has been very cheap since early 2009, but then from September the news coming out of the US started to get better than in the eurozone. Fund managers started to reposition portfolios and we switched from being negative on the dollar to a long position. It was interesting to see the market follow us within two or three weeks. Now you hear everybody is in favour of the dollar, but we got the dollar/euro call spot on.
Which sectors do you favour?
Within the sectors there has not been a clear trend. In the first wave, the cyclical sectors – everything which was linked to the recovery of the economy – strongly outperformed the defensive sector. We had a very strong position in our underlying selection.
In the next phase of the market it is more about the differential between the global trade, companies which are benefitting from the emerging market link, and the re-appearance of global growth.
Nobody wants to own US domestic consumer stocks any more, and within Europe you have the same picture – nobody wants to own the core of Europe, such as Germany, France, Netherlands and the UK. And nobody wants to own Spain, Greece or Italy. This is why you see the spread between Germany and France on the one hand and the southern European countries has widened by about 13%. We think this will stay with us for the coming year because the austerity measures being taken by the respective countries will dampen any recovery.
For us it is more about geographical dispersion – big companies linked to emerging growth and everybody who is not, linked to the domestic demand in the US as well as Southern Europe.
Should investors be looking at Balanced Managed sector funds?
It depends what the purpose of this fund is in the portfolio of the investor. People should look at the portfolio where a fund manager has the freedom to express their views. So, whatever you argue about strategic allocation, for us the Global Allocation fund tries to exploit asset allocation and currency views, plus strong conviction in stockpicking.
If you basically have a tracker fund that tries to mimic a benchmark then it might not be appropriate for your client. We still feel this is a fund where we can express our conviction. We can take deviations from the benchmark, markets and currencies – which we do when expressing our strong convictions in securities. So for us it is an appropriate product.
How will you look to develop the fund over the next year?
We think the year ahead will be positive for risk assets. We are still worried about government bond risks.
We are looking at three possible outline scenarios – that is the baseline scenario and two risk scenarios. The market at the moment plays the baseline scenario quite nicely which is one of the stimulus working and then we have a couple of years of sub-potential growth. But also we are running on this very narrow cliff. On the one hand we have the risk of deflation and going back into a double dip, and on the other the risk of high inflation. At the moment we are looking out for the factors which would determine high inflation or low inflation – and how we re-position the portfolio if we think one of the outline scenarios becomes our dominant view.
At the moment we still think the baseline is the highest probability. The central banks are doing quite a good job trying to keep inflation under control. They have taken appropriate measures to unwind quantitative easing and are now talking about raising interest rates. So we expect higher volatility and the market will make a move between fear and greed depending on whether we are in a state of inflation or deflation.
We are quite keen to have the right tools – for example we can use futures and other derivative instruments to quickly move the risk profile around. We do not want to be bound to moving real assets because the market will not allow us to wait till we have sold securities. We will use more derivatives to dampen down the volatility of the portfolio.
