Focused on absolute returns

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Talib Sheikh, who is part of the team that runs the JPMorgan Global Macro Opportunities Fund, is confident of achieving ‘cash plus 7%’ this year. Find out what he is betting on.

Most fund managers, whose performance is measured against the market indices, would be pleased if they were to generate annual losses smaller than those of their funds’ benchmarks. Beating the benchmark, however, would not be good enough for absolute return players such as Talib Sheikh if his fund fails to achieve any positive returns for investors in a calendar year.

“At the end of the day, we are trying to deliver cash plus 7% each year through varying market conditions,” London-based Sheikh, portfolio manager and managing director of multi-asset solutions at JPMorgan Asset Management, tells Personal Wealth in a recent interview when he was in town.

The 44-year-old Englishman who was born in Africa is part of a three-man team that manages the €4 billion ($6.1 billion) JPMorgan Global Macro Opportunities Fund. This Singapore-registered fund, which opportunistically invests in a variety of asset classes including equities, bonds and currencies around the world, targets positive returns in various market conditions by exploiting the investment opportunities created by global economic trends and macro themes.

“What we are trying to do is to have several macro themes to build a really diversified portfolio consisting of 25 to 30 of our favourite strategies and trades in order to deliver a return stream that is uncorrelated to where the markets are going,” explains Sheikh.

This global macro fund is unlike other mixed-asset funds, most of which use key factors such as valuations, macro signals and sentiment indicators to gauge the attractiveness of different asset classes around the world. “For us, we base everything around macro themes,” says Sheikh.

The trio took charge of the fund in late 2012 when it underwent a change in investment approach. For the past three years, the returns generated from this top-down-driven, multi-asset-class fund have been decent. It turned in gains of 16.11%, 12.71% and 9.66% in euro terms in 2013, 2014 and 2015, respectively, and was able to reach its objective of delivering “cash plus 7%”.

“We do not guarantee anything and the returns are not easily achieved. In the three years we have been running the fund since we made some changes to the process, we have delivered nearly 13% annualised gains, which is pretty attractive. On a forward basis, I think cash plus 7% is still achievable,” says Sheikh. The fund is down less than 1% this year as at April 25.

He is betting on the strength of the euro and yen against the US dollar and the outperformance of Australian government bonds versus Asian credits. On equities, he is bearish about Japanese equities while staying positive on global healthcare and European telecom stocks.

Global macro approach
Many top-down asset allocators rely on computer models to pick the macro trades for them. At JPMorgan AM’s multi-asset solutions, however, it is the fund managers who drive the investment and asset allocation decisions, says Sheikh.

“We really don’t believe in black boxes and we absolutely do not have a black box approach to [portfolio management]. In terms of decision-making for the fund, it is really driven by the three portfolio managers — Shrenick Shah, James Elliot and myself.”

Shah is executive director and portfolio manager at the JPMorgan AM’s multi-asset solutions team; Elliot is managing director and chief investment officer at the unit. Sheikh says each of the three fund managers running the JPMorgan Global Macro Opportunities Fund has an area of specialism. “I have a background as a rates and fixed income manager. James has a background as an equity manager and Shrenick spent years as a derivative trader.

"We work as a team to build the best portfolio that we possibly can. We will be sitting in the room, debating macro themes, mispriced assets, and pitching ideas to each other."

At the moment, the JPMorgan Global Macro Opportunities Fund has eight macro themes: low inflation, supply side weakness, Europe’s gradual growth recovery, China in transition, emerging-market (EM) rebalancing, US economic strength, Japan’s economic recovery and global policy divergence.

Kean Chan, senior analyst at Fundsupermart.com, says: “After the global macro themes are devised, the managers search the entire universe of asset classes and instruments that are eligible for the fund and choose the most efficient or optimal way to express and play out the theme. These methods and instruments employed by the investment managers to express their themes for the portfolio usually comprise both traditional and sophisticated strategies.”

Sheikh says “25 to 30 traditional and sophisticated strategies and trades” are then formulated based on those eight global macro themes. For instance, for the “China in transition” theme, a short position on European energy and industrial stocks is implemented.

Traditional strategies include single directional bets such as having a long position on a particular group of equities or bonds while sophisticated strategies include relative value trades or dynamic hedging strategies often implemented via derivatives, says Fundsupermart.com’s Chan.

He observes: “The sophisticated strategies allow the fund to hold up better during times of high market volatility or when unexpected events have an adverse impact, forcing a repricing of financial assets.” For instance, he points out, during the market downturn last August and September, triggered by the devaluation of the renminbi and “when there was heightened volatility and financial markets were hit by the risk-aversive of market participants”, the JPMorgan Global Macro Opportunities Fund surprisingly incurred no losses during those two months, when global equities were down nearly 9% from July 31 to Sept 31, 2015.

Under the watchful eyes of Sheikh, Elliot and Shah, Chan says, the fund has been displaying negative price correlations to global equities, bonds and commodities since November 2012. Its negative correlation to traditional asset classes is a key reason it has been such a hit with global investors in recent times.

“We have seen huge interest in the portfolio and I don’t think it has to do with the fact that we got some really good performance over the past few years,” says Sheikh. “More importantly, I think people have realised that the markets and investing environment have changed and their beta strategies may not work as well going forward. Investors have realised that they need to have something different in their portfolios.”

The JPMorgan Global Macro Opportunities Fund, which was rolled out to retail investors in Singapore earlier this year, has seen inflows of €1 billion over the past two months. “I have never worked on a product for which we have seen such interest from sovereign wealth funds, institutional and retail investors, private banking clients and all across the entire distribution platform from Asia through to Europe,” Sheikh says, beaming.

Relative trades
This year, the fund manager says his team is focusing more on “relative value trades” and less on one-directional bets. Currency pair trading, equity longshort positions and betting on the outperformance of a particular group of bonds versus other fixed income securities are examples of relative value trades.

“The market is not conducive to taking directional risks. When I look at the equity and interest rate sensitivity of the portfolio, they are both near zero or as low as they have been in the life of the fund. We are not hugely bearish on equities and fixed income assets, and I am not calling for a recession. But I think returns [from bonds and equities] are likely to be lower and the risks are likely to be higher. One of the benefits of running a multi-asset macro fund is that we can concentrate on running relative value positions and we are finding fertile ground in that part of the portfolio.”

As for currency plays, Sheikh says the fund has taken a long position on the euro and yen versus the greenback since early this year. He observes that the European Central Bank recently stopped trying to devalue the euro. “ECB said it wouldn’t cut the deposit rate any further. I think the euro could be stronger from here and so could the yen.” As at April 26, the euro has appreciated more than 3.7% against the US dollar since the start of 2016; the yen has strengthable ened more than 8% versus the greenback.

Both Europe and Japan are experiencing a deflationary environment, says Sheikh. “That means real interest rates [or nominal interest rates minus inflation rates] are higher than they should be. That is very positive for currencies such as the euro and yen.” Nonetheless, the US dollar could continue to strengthen against currencies such as the won, rand, Mexican peso and New Zealand dollar, he adds.

“The idea that you can buy the US dollar against everything is wrong. If you were long the US dollar against the yen or euro this year, you would have lost a huge amount of money. In 2014, it was all about long US dollar against the G10 FX such as the euro, sterling, yen. In 2015, it was about long the US dollar against a basket of EM currencies. What we think is relevant in 2016 is to long the US dollar against trade-related currencies such as the won, Mexican peso, New Zealand dollar and South African rand.”

Bond bets
As for fixed income, none of the developed market government bonds looks attractive except for those in Australia, according to Sheikh. “One of our favourite core government bond markets globally is Australia’s. We continue to see signs that the Australian economy continues to slow. Part of it has to do with the domestic side of its economy as well as its very well-known trade linkages to China.” Yields of around 2.5% for the 10-year Australian government bonds look relatively attractive compared with other developed market government bonds, and prices of these Aussie fixed income securities could also get a lift from the expected interest rate cuts from the Australian central bank, says Sheikh. “It is not unreasonable to see the [Reserve Bank of Australia] cut interest rates further this year,” adds the fund manager, who is also seeing more investors from Japan and Europe buying the higher-yielding Australian government bonds. “Australian government bonds are a long-duration core position in the traditional part of our portfolio. I don’t see any level in the near term where we would decide to close that position out.”

Aussie bonds could also be part of a relative value trade that involves shorting Asian investment grade corporate bonds and pairing it with a long position in Australian government bonds. “We think there will be a continuation of the deterioration of the credit environment across Asia,” says Sheikh, who reveals that his fund currently holds no EM debt or equities and has no exposure to high-yield bonds.

To be sure, EM assets do look cheap, but over the next three to six months, there is no catalyst that would unlock the value in developing-market equities and bonds, according to Sheikh. “Things could get interesting towards the backend of 2016 and into 2017, when you could have a view on EM equities and which countries and what kinds of stocks you want to buy… It is too early to make that call yet.”

The main reason for not buying high-yield bonds is their illiquidity, says Sheikh. “We are just nervous about the liquidity risk. That is important because we are running a cash-benchmarked total return fund. Liquidity is critical for a portfolio like ours. At the end of the day, we offer daily pricing with daily liquidity in this portfolio. And it is beholden on us that we do not have a [liquidity] mismatch in our portfolio.”

Equity plays
As for equity trades, Sheikh likes global healthcare and European telecom stocks. In a low-growth world, many healthcare companies are still growing their earnings and paying decent dividends, he says. “Healthcare companies have the ability to grow their earnings in a way that it is not tied to ‘traditional economic cyclicality’ and that is quite attractive.” The JPMorgan Global Macro Opportunities Fund is currently invested in pharmaceutical companies such as Pfizer, Sanofi, GlaxoSmithKline and Novartis.

As for the European telecom sector, Sheikh says many of these companies have attractive and sustain strengthable dividend yields and look attractive versus other European stocks. “We are quite bearish about Europe. We think that deflation will persist for a very long period. And many of those European telecom companies are very adaptable to operating in a deflationary environment. They have been doing it for the last 10 years or so and have had to learn how to adjust their business models to falling prices rather than rising prices.” His fund has stock holdings in French telecom player Orange and UK communication services company BT Group.

Regionally, Sheikh is bearish on the equity markets of Japan and China, adding that he is quite nervous about Japan, where the Bank of Japan (BOJ) could be running out of policy tools after its latest negative interest rate policy failed to boost inflation and consumption. “There has been lots of talk in the markets on how central bankers could run out of policy tools. We don’t think that they have, but the testing ground for that thesis is in Japan. It makes us quite bearish on Japanese equities and we think the yen could rally significantly from here. It means many of our ‘risk off’ positions are centred on Japan.”

As for China, which is facing a slowing economy and “a huge credit bubble”, the downside risks to China-related assets have yet to play out, says Sheikh. “There has been huge misallocation of capital in China and, when you have a massive credit bubble, some bad things will happen. One could argue that that hasn’t really been played out in China yet.”

Achieving targeted returns
With the JPMorgan Global Macro Opportunities Fund slightly in negative territory for the year on top of its burgeoning asset size, it certainly could be more challenging for Sheikh and his team to achieve their targeted gains in 2016. With the ICE 1-Month Euro Libor — the benchmark of the fund — hovering around -0.34%, the JPMorgan Global Macro Opportunities Fund would have to deliver gains of more than 6% this year to hit its return objective of “cash plus 7%”.

“[Performance so far this year] is not great but we still have many months left in this year. Cash plus 7% is something we are aiming for and we feel comfortable that it is still an achievable objective this year,” says Sheikh.

Performance aside, the fund’s low correlation to traditional asset classes and its inexpensive annual management fee of 1.25% make it an attractive retail investment fund for investors who are looking for a portfolio diversifier, says Fundsupermart. com’s Chan.

“Offering daily liquidity terms, retail investors could access a macro hedge fund-like strategy within a unit trust framework with this product. Investors looking to diversify beyond traditional asset classes and long-only strategies can consider this fund as a supplementary allocation for their portfolios,” says Chan. Nonetheless, he recommends that the JPMorgan Global Macro Opportunities Fund should not be a core holding in one’s fund portfolio because of “its risk classification and the employment of leverage as part of the fund’s overall strategy”

This article appeared in the Personal Wealth of Issue 726 (May 2) of The Edge Singapore.