Investing in riskier assets is an advantage when managing absolute return strategies, says Julius Baer’s Enzo Puntillo, because you can take advantage of erratic price movements on both sides.
Puntillo has run the group’s Absolute Return Emerging Market Bond fund, recently launched to the British market, since it was unveiled in 2007.
He says there is a “valuable argument” for combining emerging market fixed income – a riskier asset class – with an absolute return strategy, as the macro picture can cause erratic price actions which managers can take advantage of on both the long and short sides.
Puntillo’s philosophy is to run a neutral portfolio without benchmark constraints and to actively manage positions with conviction.
He says the portfolio is well-balanced, but last year it was negatively exposed to the market. “From September we reduced our long position and went short on local emerging market currencies by using put options on the new Taiwan dollar, Czech koruna and Brazilian real. This meant at the beginning of October we had zero exposure to the market.”
However, he adds, he took advantage of the sell-off in October and bought the American dollar and American dollar-denominated bonds.
He also became concerned about exporting companies, a key part of Asia.
“Since last summer we have had a clear picture that emerging markets would be dragged into the global slowdown which would be a huge risk for exporting countries. I increased exposure on the short side in Asia and also in eastern Europe and Panama.
“In recent weeks I have become more constructive with currency. In Asia I have built up a position in the Korean won, which was heaviest hit in the emerging market space but [the fund is] still short on the Singapore dollar and new Taiwan dollar as Asian exports are coming down and, therefore, the currencies weaken.”
He has also moved long where he is positive on the interest rate side. “In Brazil we expect more interest rate cuts and growth is slowing very quickly but I still think the country has room to grow.”
Overall he remains cautious and does not think we will see improvements quickly, particularly in the exporters.