Asset Allocation: SYZ Asset Management’s Hartwig Kos ramps up cash to avoid risk

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For SYZ Asset Management’s Hartwig Kos protecting from risk is now paramount in his investment strategy on the £266.8m OYSTER Absolute Return fund.

The fund manager, despite having the largest chunk of the fund in bonds, says both equities and fixed income look very expensive at the moment as he decides to ramp up the cash exposure to more than 10 per cent.

Kos says: “From a valuation perspective all asset classes look pretty bleak, equities are actually the least bad asset class now. There are a lot uncertainties in the bond market so we kept our durations down.”

However, the bulk of the recent performance of the fund came from bonds, which make up 73.5 per cent of the fund, while the equity portion is 13.1 per cent.

Kos says: “Everything we do in the fund is risk-managed and it has a bond replacement strategy, taking things step by step and managing drawdown very closely.”

In particular, Kos started to reduce the risk in the fund by avoiding any multiple currency themes in the fund, sticking with sterling.

He has also cut the emerging market currency bond exposure of the fund as they have become increasingly pricey.

He says: “There is a lot of volatility in the currency market so we think this is very unpredictable from a risk perspective, so everything in the fund is in sterling.

“Also, at the beginning of the year our emerging market currency bond was the highest in our bond exposure, but we sold that and now it is around 4 per cent.”

He says the resources have then been allocated to cash in the portfolio.

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Kos says: “Cash is king for us now. Bond yields in emerging markets, they are rallying a lot and there is very little spread left.”

However, the fund manager tries to profit from the primary market in bonds which he says has been “extremely beneficial” to create “incremental outperformance.”

Kos is co-head of multi asset, vice-chief investment officer and a portfolio manager on the absolute return fund.

Prior to joining SYZ in October 2015, he was investment director of the global multi asset group at Baring Asset Management for 10 years.

He says SYZ Asset Management is a “small shop” but with “a good track record” especially in sterling stocks. Since the beginning of this year the fund has seen “unbelievably steady performance”, Kos says.

The fund has returned 4.8 per cent year to date against 0.3 per cent of the ICE LIBOR one-month index.

Before Kos joined the company, the fund saw an annual loss of 0.6 per cent in 2015, against a 0.5 per cent positive return of the index.

The spike in bund yields and changes in the correlation between government bonds and equities were some of the factors for the dip.

However, since then, the team has reinforced the fund’s investment process, bringing in further expertise on new asset classes and new asset allocation tools for risk budgeting.

More people are also now involved in the management process including chief economist Adrien Pichoud, who was hired in 2010 and promoted to his current role in the summer of 2015.

The management of the absolute return fund is team-based with chief investment officer Fabrizio Quirighetti, fund manager Roberto Magnatantini and Pichoud all taking a role.

The team has three meetings a month to discuss research, economics and macro-economic activity of over 33 developed economies.

The fund’s asset allocation is defined using a top-down approach, Kos explains, as it tries to forecast the near-term impact of the main macroeconomic changes influencing the financial markets.

He says: “We start our asset allocation with cash then nominal yields. Economic and valuation analysis are a great starting point to decide on asset allocation incorporation. We don’t have a neutral force ourselves to have a view in the market.”

For the equity allocation, however, the team uses a bottom-up approach and for fixed income, the focus the fund is focused on quality and liquidity.

Kos says everything is liquid in the portfolio and that he is able to transfer the whole portfolio to cash in three days.

He says: “These are products you can put in your portfolio where you shouldn’t worry about volatility.”

Looking at the future market outlook, Kos says the team will continue to maintain a cautious approach and, if necessary, continue to reduce the risks in the fund.

He says: “We are in an environment where we want to protect capital as many macro risks can impact valuations. We have downgraded our preference for risk and are now extremely cautious on market risk.

“We have the Italian referendum and the US election looming. Donald Trump is a significant tail risk and although monetary policy seems to be normalising, it is still something that can create volatility.”