Understanding how macro views shape funds

According to Eric Clapton, managing director of Wellian Investment Solutions, this includes understanding the rationale used for stock selection.

Some managers actively trade macro views, others may tilt their portfolios based on macro views and for some managers macro views will have no bearing on their portfolios at all.

Mr Clapton says fund managers should be asked for the house view of the macro-economic environment and how they use that view when selecting stocks.

Where a fund manager is investing in the potential of an economic trend, Mr Clapton says evidence should be requested to validate the manager’s assumptions and rationale.

The answers should then be considered against the enquirers own macro-economic viewpoint, he says.

The regulator’s focus is very much on customer outcomes and that needs to be the starting point for developing new funds, says Emiel van den Heiligenberg, head of asset allocation at Legal and General Investment Management.

Defining the target investors will identify their investment time horizon and risk tolerance, says Mr van den Heiligenberg.

From the regulator’s perspective, Mr van den Heiligenberg says he believes that what is most important is to be clear with investors about what is driving the investment process and to ensure that the actual approach closely reflects what has been outlined.

From that perspective, Mr van den Heiligenberg says he believes the regulator is supportive of macro-economic views as an input to fund management, providing the risk management is such that funds continue to operate in line with investors’ expectations and risk tolerances.

Anna Stupnytska, global economist at Fidelity Worldwide Investment, says no two portfolio managers will use macro-economics in exactly the same way.

She says this means that advisers have a real responsibility to understand exactly how a macro view has informed a portfolio, and how it has been implemented.

Ms Stupnytska says: “Having a macro view in the first place is one thing, but implementing it is another.

“These are practical questions, and have to do with a manager’s individual processes. Above all, advisers should get to grips with how and when macro-economic views are expressed in a portfolio, and this will vary significantly between managers.”

Hannah Sharman, head of investment sales at Cerno Capital, says with an equity bottom-up approach, for some stock-pickers macro views may have limited bearing on the shape of the portfolio.

She says a sensible question to ask a manager who adopts this approach may therefore be:

1) In which market environment does the fund manager expect the fund to perform well, and when less so?

2) Do your stocks have a quality/growth/value bias?

With an equity plus macro approach, Ms Sharman says a fund manager’s macro views will play an important part in his investment strategy.

Therefore, she says, advisers can ask:

1) Does what they are saying about their macro view relate to their stock selection?

2) Do you have a constructive view of the world?

3) How is the portfolio allocated between cyclical and defensive sectors?

4) Do your stocks have a particular style bias?

5) Does your portfolio have more of a developed market or an emerging market bias?

For fixed income/macro approaches, Ms Sharman suggests asking:

1) What are your views on central bank/monetary policy and how are you positioned in your portfolio in terms of duration?

2) What are your views on likely corporate default rates moving forwards and does the average credit rating in your portfolio reflect that?

3) How might monetary policy tightening affect liquidity in your portfolio?

Louis Coke, senior investment manager at Charles Stanley, says advisers should ask managers the following questions to determine how their macro-economic views shape their funds:

1) Would you describe your investment process as top down, bottom up, or a mixture of both?

2) What key themes are you trying to expose your portfolios to?

3) Are there any areas or geographies you are specifically seeking to avoid?

Peter Rutter, global equities manager at Waverton Investment Management, says he would ask fund managers how significantly their macro view influences their proposition versus other factors like stock selection, valuation work, asset allocation and risk control.

Mr Rutter says: “The more important the influence of macro-economic view, the more the adviser should enquire as to what that view is as it is much more likely to influence future returns (and risks) from the fund managers’ proposition.”