Fund Profiles

So what are we looking at in the global world of funds in the age of ETFs and passive. Yes, everything is a relative and allocators think in their relative allocation goals.

Investors may want to allocate a total of 40% into equities, and 60% into bonds.

They manage 300 billion and want to spread their assets well. So they take 20–30% of their assets (100 billion) into pure exposure plays on the index of both bonds and equities. They spread over some different counterparties and products and try to replicate the broad index also with sub index vehicles holding true exposure.

Another 30% they want to have managed “active”. So they go to fund managers that replicate the same indices but go “active” against them with different strategies. The strategy mix is broken down into:

• Thematic : Long term active selection on a trend basis
• Systematic : Arbitrage and technical investments focused on weekly/ monthly alpha harvesting
• Sector Fundamental: Strategies in sub sectors and classes of the broad index with specific expertise in the game trying to select and pick better stocks
• Macro : More focused on rotations, macro bets and so forth.

For some of those guys they buy products out of the bat if there is a proper share class (currency hedges or not, distributing or not, good fees) or they want an own share class or a seperate account with specific limits and constraints. For another 10% they dedicate to being good and ask for SRI and ESG friendly investments of otherwise the same sectors. More restrictions on the investibble universe.

Now they are left with a more strategies. All of the above are more or less relative strategies that allow them to invest and pull money at any time based on their own views of the market, because all the products are comaprable. They can choose alpha profiles between different investors, And they of course also try to manage counterparty exposure and concentration to limit the risk of key men leaving, reputational damage wrecking the portfolio or bad performance leading to AUM dynamics tht distract the PM from allocating to focus on client acquisition or retention. And so forth. There is a lot of opsrisk inside of all of this as well.

So what remains are the absolute return strategies which break down into LDI and Growth strategies.

LDI is defined by budgeted and forecasted turnovers in the investment vehicle. The fund needs to be potentially hold x% of liquidity every quarter end to be available for drawdown. If this x% is 20%, roughtly one fifth of all assets in that fund must be available for drawdown at no or very low risk of capital. This would be partially achieved by holding 3 Month maturity bonds which all end quarter end. Which would lead to a 100% cash at the end of the quarter. You could hold 33% for each month end maturity and you would always have 33% of cash available at the end of each month and hence each quarter. But you can also had longer duration bonds who mature at different dates. That is classical fixed income strategies.

On top of that, you have multi-asset strategies that aim to control volatility of the NAV per share with high resilience to drawdown for an absolute return, all weather, multi-strategy portfolio. Ideally you earn a premium over a comparable fixed income portfolio that is justified and you can hold volatility low at 10–20% draw down at quarter end. The more drawdown of AUM you aim for, the harder it gets to retain low volatility.

These strategies are a blend of LDI and growth, because they have to function as LDI — being liquid and not in loss state when money may be drawn down — but should be growing stronger than bond portfolios.

In the last you have the absolute return portfolios which are aiming at earning superior returns over the very long term. They may have massive drawdowns in their P&L for shorter or longer periods of time, but ultimately should add to superior returns. The role of the PM is to identify the stocks that get the returns and to manage the allocation and built-up of exposure during the volatility cycle of the stocks.

The last one typically is around 5% of such a large institutional portfolio, with 20–30% being LDI, 10–20% being all-weather absolute return multi-strategy themes, 40–60% being long-term investments for capital accretion with different levels of hedges and specific exposures like ESG, SRI, currency and industry over-exposure, active strategies and so forth. And the rest being these very volatily hyper growth profiles.

In the balance sheet of the investor, the known liability side has to watch the LDI sizes depending on maturity buckets.

1. Shor-Term / Intra Year Liabilities are served with clear LDI strategies and some all-weather and money-market/cash insitruments.
2. Mid-to-Long-Term / Multi Year Liabilities are served mostly and up to 80/90% with longer-duration, higher yield LDI strategies and a bit more of the active / equity side strategies.
3. The money for stable capital accretion and protection are all entering a mix of bonds (10–20%) to equity vanilla (40–80%) and all-weather absolute return portfolios (10–15%)
4. And to sweeten the overall return profile, 5–10% are entering the hyper growth profile.

For a private household, the strategies mostly look more like reducing liabilities to almost nil and holding cash or cash equivalents (short term deposits and bonds) for cash management and putting everything else into the equity vanila and hyper growth box, ideally realizing outsized returns at some point and moving to a higher split of vanilla indices and dividend strategies versus growth. Untill it all moves increasingyl to capital protection and all weather strategies and fixed income at the end of the life cycle.

Like this content? Well, ask for more by leaving a like or comment.