The exuberance in the equity markets is a little too much for the managers of JP Morgan’s €6 billion Global Macro Opportunities Fund. “This was the reason for the investors to increase the number of short positions in shares, via options on the S&P 500 and individual short positions in a few individual titles. We’ve reduced the risk”, said Nicola Rawlinson in an interview with Fondsnieuws, Investment Officer Luxembourg’s Dutch sister publication.
Rawlinson is a product specialist at the fund, which operates at the intersection between being a traditional mutual fund and a hedge fund, playing long-term macroeconomic trends through long positions in equities and applying hedge fund tactics such as “short bias” and “relative value” to cyclical developments. Bond and currency positions also fall within the short-term approach.
“Since the end of October, we have increased our short-bias equity exposure. We see a bit too much exuberance in the market in general, but also in some individual titles in particular. As soon as the risks subside, we can add some more risk exposure,” Rawlinson said of the decision to reduce net equity exposure from 30 to 23 per cent in a few weeks.
Another of the managers’ current choices is to adopt a barbell approach at the sector level, with cyclical equity exposures roughly equal to defensive stocks.
Tail risks
Rawlinson explained this choice in detail: “Because of the split between two dynamics, with tail risks such as stagflation on the one hand, and a reduction in uncertainty in the fourth quarter on the other, we are now in a position to take a more prudent view. In the third quarter that uncertainty increased, but we feel that some of it is starting to fade. Take China, we do not think the outlook for that country will get much worse in the short term. And in developed markets, we are cautiously seeing some improvement. Still, concerns about the tail risks remain, so for now we think a reduced risk exposure is in order.”
Another short-term choice made by the fund is to be long on the dollar, versus a short position on the Australian dollar and South African rand. “A good positioning for tail risk,” Rawlinson explained. “Both in a stagflation environment and global growth slowdown, the dollar does well, and in a scenario with big resumptions and some inflation suppressors and a consequently faster moving Fed.”
Protective role: less topical
Since the start of this year, the fund has stood at a net return of 5.4 per cent (as at 31 October, with ongoing charges of 0.78 per cent), compared with a benchmark return of 0.48 per cent. In 2020, the fund achieved a net return of 12.4 per cent, against -0.5 per cent for the benchmark. Rawlinson said part of the fund’s hefty inflow of $2.3 billion last year was due to its strong performance in 2020. “New clients, but also investors who already had the fund in their portfolios and expanded their positions,” she said.
The more protective role that hedge funds usually (also) play in investors’ portfolios is somewhat less prevalent among new buyers of the fund, according to Rawlinson. “People are still leaning quite a bit towards equities, there is still a lot of euphoria in the market. But perhaps we are now entering a climate where investors are starting to have some doubts about equities. That might help steer them more towards us.”
Long-term themes
The fund’s long-term correlation with equity markets is around 0.3. “Relatively low,” explained Rawlinson “This is valuable because if we think equity markets are reflecting our macroeconomic views well, we can bet heavily on equities. But if we are concerned, as we were in the first quarter of this year, we can downsize our portfolio, diversify and make the correlation with equities negative.”
These macroeconomic views define the team both secularly and circularly. In the long term, the fund’s four managers are betting on the adaptation of new technology, the disruption caused by climate change and consumer demand in emerging markets. In the short term, in addition to cyclical themes, it is also about the point in the macroeconomic cycle we are in.
Sub-themes on which the fund’s managers are currently focusing include cloud computing within the technology theme and electricity generation within the climate change theme.: “These preferences can manifest themselves in the purchase of individual titles but also in the purchase of equity future,” explained Rawlinson. “At the beginning of the year, for example, we were long in Industrials, financials and basic resources due to the expansion phase of the economy, but short in utilities, health care and consumer staples.”
Long positions
The fund’s largest long positions are currently within the software sector, through positions in large companies focused on digital transformation. Digital payments companies are also attractive to investors.
Within climate change, the JP Morgan team sees opportunities in companies benefiting from building emissions reductions, while the third overarching theme focuses on the growth of the middle class, through investments in media streaming services and big pharma names.