Forecasts for investing? Unigestion prefers 'nowcasts'

Singapore

MOST investors hunger for forecasts of the future, but Unigestion's alternative risk premia (ARP) fund eschews forecasts in favour of "nowcasting".

Joan Lee, Unigestion's senior vice-president and multi-assets portfolio manager, said: "We think it's difficult to forecast. What will happen tomorrow has little to do with asset prices today. What's important is where we are currently."

The ARP strategy seeks to harness alternative or uncorrelated risks, typically in a long/short format. Traditionally, ARP strategies have been used in hedge funds, but more recent offerings by fund managers are part of a multi-asset product suite. Unlike hedge funds, recent ARP funds also feature daily liquidity.

Unigestion's ARP fund is purely systematic. It seeks to harness as many as 12 risk premia such as FX carry, credit carry, single stock equity factors and cross-asset trend following.

Using inputs from more than 1,000 indicators, the firm has developed three nowcasters - one to identify recession risk, one for inflation shock and a third for market stress risk. "The nowcasters are produced daily to give us a sense of how likely it is to be in the three regimes, so the portfolio can be systematically and dynamically tilted," said Ms Lee.

While most other ARP funds may be equally weighted across the risk premia, Unigestion weights the risk premia according to the historical probability of the world being in one of four stages of an economic cycle - namely, steady growth, recession, inflation shock and market stress.

"We looked across the globe. How often have those regimes materialised over the past 50 or 60 years? Roughly 60 per cent of the time, the world has been in growth mode; 15 per cent in recession; 15 per cent in inflation shock and 10 per cent in market stress."

Unigestion research suggests that different risk premia fare better under different regimes. Hence, rather than a static allocation, the risk exposures are adjusted dynamically, depending on signals and scores from the nowcasters.

The inclusion of the ARP strategy into Unigestion's multi-asset portfolios was the initiative of Jerome Teiletche, who joined the firm as head of cross-asset solutions in 2014. "Jerome said at the time that equities were quite extended in valuations; bond yields were very low and set to rise. He was concerned about the multi-asset funds' high exposure to these assets. From the get-go, he said he wanted 25 per cent of the risk budget in the ARP strategy. These are long/short strategies and tend to be market neutral."

Unigestion manages about US$24.8 billion in assets. The Uni-Global Cross Asset Navigator Fund has around US$291 million in assets, and the Uni-Global Alternative Risk Premia Fund has about US$207 million.

Ms Lee said there is potential for assets in ARP strategy to grow to between US$2 billion and US$5 billion. "There is a lot of interest from various investors - family offices, institutional clients, insurers and sovereign wealth funds. Some are concerned about equity valuations, but still want to get income."

The Uni-Global ARP Fund aims to deliver returns of cash plus 7 per cent gross, over three to five years, "while protecting capital during market downturns". The Uni-Global Cross Asset Navigator aims for returns of cash plus 5 per cent gross over three-year rolling periods, with 6 to 8 per cent volatility.

So what are the nowcasters saying about the macro-economic backdrop? Ms Lee said: "We continue to see a relatively low risk of recession and high inflation surprise risk, globally speaking. These have been with us for the most part of the year. Since last week, however, we have seen a significant increase in market stress risk due to an increase in both volatility and spreads.

"As a consequence of all three nowcaster signals, in traditional assets, we are currently long government bonds and industrial metals, and short credit and equities. In alternative risk premia, the nowcaster signals have led to an underweight in dividends carry and volatility carry, and overweight FX value."