Nedgroup Inv Global Cautious comment - Sep 12 - Fund Manager Comment25 Oct 2012
There were some significant market events throughout the month including open-ended quantitative easing from the Federal Reserve, unlimited bond purchases by the European Central Bank (ECB) for a country requesting aid and a surprise increase in stimulus measures by the Bank of Japan. While equity markets made modest progress, the political and macro backdrop still looked bleak, with violent anti-austerity demonstrations in Spain and Greece, the announcement of an independence vote in the Catalonian region and the economy taking centre stage in the looming US Presidential election. With weak global PMIs and global growth slowing, the effectiveness of unconventional policy is firmly in the spotlight to see if monetary policy can be translated into real economic growth and employment.
Against this backdrop, the Fund maintained a number of core allocations. Our physical stock allocation has a conservative diversified profile and a low beta to the broader market. We maintained our Australian real-yield position and within convertible bonds, our allocation ranged between 8% and 14% as we took profit on some of our names towards the end of the month. All of these allocations added to performance in September. However, our macro overlay was a negative contributor with our shorts in US small cap and German Dax futures detracting value in a rising equity market. We were too cautiously positioned at the start of the month as the market began pricing in extraordinary action from central banks and we added to our equity exposure as our Global Strategy Team (GST) added to risk. We reduced our US small cap position and added some Eurostoxx futures, remaining short the German Dax as a play on the sensitivity of German exporters to a Chinese slowdown, which we believe will pose a greater risk than the market anticipates. While our headline delta remains towards the top of our 30% limit, our overall equity sensitivity is lower than the number would suggest given the low beta of the stock profile.
We remain constructive in core fixed income with positive contributions from our long position in the Australian 10-year part of the yield curve and our US Treasury cash bonds where the roll and carry remains attractive. However, our decision to be long at the 30-year part of the US curve detracted value over the month as the Federal Open Market Committee (FOMC) placed the employment part of its dual mandate above inflation concerns, both with the open ended nature of quantitative easing and its forward guidance, where rates are expected to remain low even when the economy has begun to recover. We closed out this position and gradually reduced duration from a high of around 6.0 years towards 3.8 years as fixed income continued to perform well.
Looking ahead, we are becoming more positive on risk assets in the medium term, given the concerted monetary easing we have seen from several central banks around the world, which has allowed markets to stabilise. We acknowledge that global growth remains muted and will likely remain so for some time to come. However, with several potentially catastrophic tail risk events now off the table, market sentiment has picked up and our GST remains constructive on risk assets. Given the news flow, which has been on balance more positive, we are happy to remain with our current allocations, notably a conservative stock allocation with smaller future hedges and some core protection in the form of fixed income. While the Fund in terms of equity allocation remains tilted towards the US, a key consideration is whether we should add risk in Europe at the expense of our North American exposure where valuations are more expensive and the actions of the ECB have seemingly taken a euro breakup off the table in the medium term.