Brian Singer, head of William Blair’s Dynamic Allocation Strategies team, discusses the case for global multi-assets in today’s environment, why the team’s approach to global multi-asset investing is unique, and the role of such a strategy in a portfolio. Watch the video or read the recap below.
What are some of the main investment factors investment managers should consider in today’s environment?
Three primary factors: central bank behavior, geopolitics, and populism. Central banks have spent a long time building their balance sheets, and now we have to look at a long time unwinding the balance sheets. Geopolitics–the world now is geopolitically unstable. It wasn’t that way when I first got into the industry, but now we have to take account of those developments around the world. And then, finally, populism. Populism is a huge movement, and it’s a movement that stands for nothing. It stands against something, and that’s the existing elite.
Why does a global multi-asset approach make sense in this environment?
There are a number of macro drivers out there, whether it’s central bank activity, populism, or geopolitics. All of those things are influencing all assets, not just stocks, not just bonds, and not just currencies. And it’s important in any portfolio to have appropriate cognition and positioning around these macro developments to try to help manage risk and actually take advantage of opportunities to enhance return.
There are lots of multi-asset players out there. What makes your style unique?
As a macro manager, all of our analysis is predicated on a fundamental foundation of determining what fundamental values are for assets or for currencies. Once we have that foundation, we use a very explicit process to determine why prices may deviate from fundamental values, why those opportunities actually exist, and in response to that, we’re navigating developments that are shorter-term in nature.
We like to think of investing like the surface of the ocean. There are tides, there are waves, and there are ripples. We want to ride the tide of fundamental value, we want to navigate the waves of geopolitics, and we want to ignore the ripples on a day-to-day basis.
We’re fundamentally grounded as an asset manager. We are very dynamic in our risk management. We don’t target a risk level. We take more risk when there are opportunities and take less risk when there aren’t any opportunities. And we are an active user of currency management in the portfolio.
Is there a danger you’re trying to second-guess everybody else who’s out there in the market?
There is a danger that a macro investor could be caught up just trying to second-guess other investors and second-guess the market. However, if you have a very structured process and frameworks to undertake the analysis, that helps guide the thinking. For example, we use game theory as a tool to navigate geopolitical developments. That helps us understand the negotiating positions and strategies of the players. So, with Brexit, for example, there will be threats going on. There will be bluffs going on. There will be lots of things, but it’s important to remember what the objectives are for the players. To do that, you’re basically using game theory.
How important is currency to risk and return in your portfolios?
Currency is very important to us. We actually allocate a large portion of our risk budget to currency management. We do that because fundamental value is a powerful, powerful force in exchange rates and because it’s such a tremendous diversifier for our portfolio and for our clients’ portfolios.
What is the role of a strategy like yours in an overall client portfolio?
The strategy that we have is used in many different ways in portfolios. For example, in some instances, it provides asset allocation. It moves between asset classes, markets, and sectors in a very flexible manner. We also actively manage currencies, and because we actively manage currencies, we’re able to do things often that other portfolio managers–or, in fact, the broader pension or endowment or whatever the larger vehicle is–can’t actually do. We also have the ability, in the portfolio, to be very flexible. It’s a liquid portfolio, and we can move in and out of these major macro developments around the world, in and out of these markets and currencies, very rapidly.
Are there any particular market conditions that act as tailwinds or headwinds to the way you run the money?
There are always tailwinds and headwinds for us. Since we’re fundamental investors, prices reverting back on fundamental values is a tailwind for us. It helps push us along. What is a headwind for us is anything that prevents prices from reverting to fundamental values or, alternatively, driving them away from fundamental values. And that’s what’s so important about central banks right now. Central banks are manipulating interest rates, and in doing that, they’re manipulating asset prices and making it difficult for them to revert back to fundamental value. The good news is we’re on now the backside of that, where it’s beginning to become a smaller impact on asset prices in the markets.