Growth and inflation around the world remain subdued despite central bank actions and rhetoric in favor of the contrary. These two economic data points are often looked at as drivers of market and currency performance particularly where we see large differentials around the world.

Given the tepid rates as well as infrequency of these data, investors are looking elsewhere to get a view on the direction of growth.

So far this year, it appears that commodity prices are being used as a real-time proxy for the direction of global growth and inflation. This has the dual (and we believe somewhat temporary) effect of turning the commodity super cycle theme into a kind of Super Theme, and also causing correlations of assets and currencies to move higher.

As a result, we’re seeing more correlated risks and a narrower breadth of opportunities across the investment universe—both in capital markets and in currencies.

We believe exposures that have a negative correlation to a macro theme help reduce our concentrated risk to these factors.

The fundamental opportunities are still relatively large, but they are riskier, more concentrated, and less differentiated. We focus on navigating these risks in the portfolio, and we’re doing so in three ways.

#1: Haircut Fundamental Opportunities

One way to navigate this environment is to own less of the fundamentally attractive, but riskier assets. Across our strategies, we’ve set exposures to be smaller than what fundamental valuation signals alone would otherwise justify.

The opportunities are less compelling because they are more risky and more correlated by a common risk factor. We’re simply not being compensated for the higher risk that narrow investment breadth provides us.

#2: Increase Use of Options

Another way that we are navigating this environment is by seeking downside protection in the portfolio. That means using long option positions in an attempt to protect on the downside while maintaining the ability to participate on the upside.

Of course, options cost money. Today’s environment is one where we are more willing to pay a bit more for this protection than we normally would be. This helps us partially bridge the gap between the fairly wide opportunity set and the narrower investment breadth.

Optionality in the portfolio does not completely eliminate the risks that we need to navigate, but it does enable us to make allocation decisions based more on fundamental valuation opportunities vs. shorter-term macro risks.

#3: Introduce Negatively Correlated Exposures

The third way we are navigating this environment is by allocating to exposures that may not necessarily present a large fundamental opportunity, but do provide a negative correlation to the commodity super cycle theme. We believe exposures that have a negative correlation to a macro theme help reduce our concentrated risk to these factors.

One example of this approach is a recent strategy change we made. We sold Canadian dollars (CAD) and bought euros (EUR), reducing our EUR short position and moving our previously flat CAD exposure to a short exposure.

Again, the EUR/CAD exchange rate does not necessarily present an overwhelmingly compelling valuation story, but this exchange rate is currently exhibiting a significant negative correlation to commodity prices, especially oil. For this reason, we believe this exposure may help reduce portfolio volatility without detracting from return potential.

The combination of these three strategies—de-risking, buying options, and adding exposures that are negatively correlated to risk themes—helps us navigate the current environment where fundamental opportunities are riskier and more concentrated.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

The William Blair Funds are available to U.S. residents only. Non-U.S. residents, please click here.

Copyright © 2020 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

The William Blair Funds are available to U.S. residents only. Non-U.S. residents, please click here.

Copyright © 2020 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
Cookie Policy | Social Media Disclaimer | Privacy & Security | FINRA’s BrokerCheck

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