By Hamlin Lovell, NordicInvestor
A strong opportunity set for active stock-picking
NordicInvestor interviewed Malin Hallén, Senior Portfolio Manager, Asset Allocation, Swedbank Robur, to identify Swedbank Robur’s policies and priorities when selecting external funds, including UCITS Hedge Funds, and evolving ESG criteria.
Which portfolios or strategies are allocating externally to hedge funds?
Malin: Our three multi-asset portfolios, the so-called Selection funds. These funds have broad investment universes and invests into equity, fixed income (including credits), FX and alternatives. The alternative bucket is focused on UCITS hedge funds. The Selection funds uses the same building blocks but differs in overall risk levels; low, medium and high. On the equity side megatrends are used to identify structural growth opportunities in long-term attractive themes. Swedbank Robur aims to be a leader in sustainable value creation which naturally applies for these funds as well.
Which hedge fund strategies do you allocate to eg long/short equity; equity market neutral; event driven; credit and distressed; CTA and macro; arbitrage – eg merger arbitrage, convertible arbitrage? What is your balance between discretionary and systematic managers?
Malin; In the Selection funds today, we mainly use hedge funds as replacement for fixed income, that means we allocate to low risk strategies such as equity market neutral, but we also have exposure to one event driven strategy. Currently most of our strategies are discretionary driven, related to the last couple of years of weak performance from most factor-based strategies. We still have some exposure to other type of systematic strategies and maybe the tide will turn with the increased dislocation the current crisis has created. A common feature is that all funds we invest in today have low market risk (low net).
How is your allocation split amongst managers based in the Nordics, Europe, US, and Asia?
Malin: Most of our managers are based in Europe, but not all. The universe of hedge funds we invest in, UCITS compliant hedge funds, has tended to be focused in Europe for historically reasons. We strive for differentiation, both in terms of where the managers are based, and where they invest and how the alpha is created.
Review of first 5 months of 2020
How has the overall liquid alternatives allocation performed in the first quarter of 2020? Do you expect it to be have a low, zero or negative correlation with conventional asset classes?
Malin: Our alternative allocation performed reasonably well until March when the equity markets fell drastically, which effected our holdings within the alternative buckets. Compared to HFRX Equity Market Neutral Index our portfolio held up well, but still ended down by the end of the quarter. In April the alternatives recovered all the lost ground and a little bit more. Of course, we would ideally have seen that the alternatives in our portfolios had been able to resist even better in the sell off than they did. But markets with a lot of forced sellers is a tricky environment also for market neutral strategies. Increased correlations and short selling bans in parts of Europe didn’t help either. In these types of turbulent markets, it is vital to focus and continue to work aligned with your investment strategy.
Did any other strategies, make money in the first quarter? How did your asset allocation change over the quarter?
Malin: Most of our investments in our multi-asset portfolios, the Selection funds, performed negatively in the first quarter except for bonds. During the first quarter we trimmed our initial overweight equity exposure to neutral and later underweight, not because we saw a global pandemic on the horizon before anyone else but due to stretched valuations.
What is your target allocation to liquid alternatives and how much flexibility do you have?
Malin: We constantly look over the allocation in our portfolios to have what we judge to be the right weights given our current view on the markets and risk level of the portfolio. We have flexible mandates and the alternative bucket could range from 0 percent up to 40 percent.
Within your hedge fund bucket, what is your average fund liquidity? Have you already made any changes as a result of Coronavirus, or do you plan any changes?
Malin: We have always focused on liquid strategies; therefore it has not been necessary for us to make any changes in the hedge fund bucket as a result of the Coronavirus. The melt-down in the market as a result of the actions taken to mitigate the effects of the Coronavirus, have however been a reminder of the importance of prudent liquidity management. In the Selection funds long-only equity bucket we have added themes such as a stay-at-home and innovation within healthcare.
Going forward, what is your outlook on the opportunity set for equity hedge fund managers?
Malin: It is important to remember that volatility also create lots of opportunities for future alpha generation. Recent market volatility and heightened economic uncertainty has provided a testing environment for many managers, but equally presented a strong opportunity set for investment styles that can benefit from increased stock dispersion and market dislocations. Increased dispersions are an ideal environment for long-/short managers.
Valuation and liquidity issues in liquid alternatives
Some Nordic high yield credit funds also reportedly suspended dealing and valuation in March 2020. Did you have any exposure in this area? Do you think daily liquidity makes sense for credit funds?
Malin: None of the managers we invest in suspended dealing or valuation. We have built up a diversified exposure in credits and only a tiny portion is exposed to the corporate high yield market, and this with focus on Europe. The Nordic high yield market is still small and thus less liquid. Given our size we prefer broader investment universes. When managing or investing, it is always important to be mindful of liquidity and adapt the approach and the investments to meet your obligations even in stressed markets, and most managers do that well. Some types of credit funds, like distressed, might not be suitable for daily liquidity vehicles.
What are your priorities in terms of managers’ ESG policies?
Malin: We have allocated to, and are still searching to, expand our exposure towards managers that has taken ESG and sustainability both to their heart and into their work, aligned with what we at Swedbank Robur has done. We have noticed that this type of managers has starting to grow in numbers, and we would like to see that trend accelerate even further. Preferable we are looking for managers that practice sustainability not just by exclusions but as part of their alpha creations. It is my firm belief that managers that adopt sustainability well will be among tomorrow’s winners. It is time that more managers start to walk-the-walk and not just talk-the-talk.
To what extent do your ESG policies apply to alternatives managers?
Malin: Having said that our official ESG policies still exclude alternatives/hedge funds. The reason being that our options to invest in the hedge funds space would decline too drastically if we were to apply them in line with our long only investments today. We aim to, in a not too distant future, raise the bar also for our alternative investments.
Does your due diligence involve ESG?
Malin: Yes, already today sustainability is part of our due-diligence process and ongoing evaluation. We discuss sustainability, policies and approaches with all managers that we have or are planning to invest into. We also screen them against Swedbank Robur’s exclusion list and discuss any breaches with the managers with the aim to push the development in the right direction and increase the awareness of these important issues. Today we wouldn’t make new investments in a manager that don’t include sustainability in their investment approach. In short, we prefer managers that have similar beliefs as ourselves when it comes to ESG and sustainability.