By Hamlin Lovell, NordicInvestor 

This article forms part of our report on Alternative Credit in the Nordics

Erik Penser Bank’s Head of Asset Management, Jonas Thulin was cautiously positioned in the first half of 20222 before he called a trough in equities in June 2022 and turned bullish. After a turbulent 2022, he is looking forward to less uncertain markets in 2023 with lower inflation and interest rates boosting risk assets.

Thulin argues that in the new economic and financial market environment of 2022, asset managers, investors and advisers need to rethink the strategic asset allocation approaches that worked so well for so many years: “The traditional view of 80% strategic asset allocation (SAA) and 20% tactical asset allocation (TAA), often also seen in risk parity, got badly hurt in 2022 as both bonds and equities sold off. Traditional portfolio theory behind the 60/40 portfolio did not work”. Indeed, the classic mix of 60% equities, 40% bonds, has had its worst return in decades as inflation hit the highest levels in decades.

Part of the problem is that many asset managers are forced to hug a benchmark. “The key difference between asset managers and institutional investors is whether they are stuck in strategic allocations or can switch into tactical ones. Traditional mutual funds in Europe and the US covered by old fashioned regulatory structures are in a losing situation,” points out Thulin. Many of these funds are often benchmarked against an index and cannot deviate very far from it, (though some mutual funds do have an absolute return target of cash plus a target return).

Thulin has been able to take some profits from falling as well as rising markets: “We can go long, short, use relative value spreads, currency overlays and also just sit on some cash. Investors need to modernize and become more tactically oriented”. This more flexible and tactical approach borrows at least some tools and techniques from a traditional hedge fund, even if it does not have as much freedom or flexibility in all areas as global macro hedge funds and unconstrained absolute return funds, that have in many cases delivered positive numbers – and sometimes strong double digit returns – in 2022. The Eric Penser portfolios have outperformed benchmarks and peers by losing less money, although they have not been up in absolute terms as of November 2022.

Proprietary analytics

Thulin has developed his own quantitative framework, analysing technicals, fundamentals, economic, liquidity, and valuation data and flows, which led to a shift in asset allocation in June 2022: “We picked the trough in June. We got out of long volatility and short equity positions and went long of equities in selected countries, including Latin America, India and Japan. A US small cap ESG strategy, investing in areas such as cleaner water companies, has also performed well,” says Thulin, who carries out daily quantitative analysis of tens of thousands of ETFs globally: “we are throwing fishing nets around the globe”.

The Eric Penser Bank allocation also bought US Treasury bonds at that time and continues to hold them. There is potential to express views on some other fixed income asset classes mortgage securities or infrastructure debt through ETFs, though Thulin would not drill down into some more specialized areas such as student debt or insurance linked securities.

Managed Futures CTA strategies

Thulin uses ETFs as a liquid and low cost way to obtain both passive allocations to asset classes, markets, geographies and sectors, and also increasingly to access active management in an ETF structure. Thulin has employed some systematic and quantitative hedge fund strategies through low cost ETFs, which make their own dynamic asset allocation decisions. “We have used iM Global Partners Dynamic Beta Managed Futures, which has ticker DBMF. It has a total expense ratio of 85 basis points,”. DBMF employs a classic CTA trend-following strategy, taking long and short positions in equity indices, bond futures, currency futures and commodities, according to recent price action. During 2022, it has profited from trades including short positions in equities and bonds. The strategy has been up as much as 30% at its peak 2022 NAV.

Shorting SEK

Eric Penser had no long European exposure for much of 2022 and in fact Thulin has at times been actively short of the Swedish Krona and has also left other currency exposures unhedged: “we have been negative on Swedish real estate since January 2022, and we expected capital outflows. Our credit exposure has been more in emerging market debt and US investment grade hedged back to SEK, rather than local Swedish corporate debt, which has a high real estate weighting”. Currency moves have sometimes been very important return drivers. “At one stage in 2022 emerging market debt had lost less than corporate debt, but we gained on the currency move,” says Thulin.

Bullish outlook

While several US investment banks are expecting further declines in equity markets, Thulin thinks the lows are in. He expects a less uncertain environment in 2023, with peak inflation and peak hawkishness on rate hike forecasts behind us, and the Fed pivoting and starting to cut rates in late 2023. His big picture view remains that the lows in high frequency economic data, leading global economic indicators and corporate profits are behind us. The election cycle in 2023 is another reason to expect a good year for equities, which tend to look 6 or 9 months ahead. This could imply that the trough in economic data and profits may occur in early 2023, but right now markets could be already discounting recoveries.

He sees recession risk in European equities as priced onto valuations. Closer to home, even if the domestic economy and sectors such as retailing and real estate in Sweden are challenged with GFC levels of retail sales, poor consumer confidence, and very low building permits, the country’s manufacturers and exporters can profit from the global economic rebound.

The global economy is rebounding, but not in all regions. “We expect a European recession but do not expect one in the US or Japan. In fact, Japan is accelerating with better business confidence. We own Japanese equity but on a hedged basis, hedging the Yen exposure. China is also stimulating its economy,” says Thulin.

Proprietary ESG Analytics

In common with many allocators in the Nordics, Thulin finds the EU SFDR categories are of limited value. Eric Penser Bank has developed its own ESG approach.“We do our own in depth ESG and sustainability analysis, which includes implied temperature rise, carbon emissions and SDGs. Only 300 funds in the world pass this screening and fit the bill,” points out Thulin.