The managers of the Invesco Perpetual Global Targeted Returns fund have said the surging volatility seen at the start of 2016 justified their decision to take a more cautious stance last year.
Head of multi-asset David Millar said the fund was able to produce positive returns in January and February because of its defensive positions. He pointed particularly to a long Japanese yen vs Korean won currency play, which boosted the fund’s returns in the opening weeks.
Millar said the positions helped mitigate the £5.4bn fund’s underperformance on the upside in 2015.
The portfolio, run by former Standard Life Investments Gars trio Mr Millar, David Jubb and Richard Batty, underperformed its larger rival last year, returning 1.6 per cent compared with Gars’ 2.8 per cent.
“In a world of being cautiously optimistic, could we have been thought of as being too cautious in 2015? Possibly. But did we defend the downside well? Yes. Did we extract all the upside? Potentially we could have been better,” he reflected.
“What we had coming into this year paid off,” he said.
Year-to-date, the Invesco fund is up 3.3 per cent, while its Gars counterpart has lost 0.6 per cent.
The absolute return fund, which runs 25-30 strategies split between credit, equity, rates and currency positions, has now rotated out of some of its defensive plays after surging volatility forced it to close out positions at the start of 2016.
Some positions had reached three-year target prices sooner than anticipated as a result of this volatility, Mr Millar said.
Mr Millar said the team had three options in such a scenario: change the target on the basis of new information and make the assumption they had previously been over-cautious; remove the position entirely; or restructure it to add more value.
He said the managers opted to remove volatility plays, including a UK equity vs UK interest rates strategy.
The fund’s yen vs won regional competitiveness play did well given the former’s safe-haven status, but a subsequent reversal, just before the strategy reached price target, meant the team will maintain the position.
“On a three-year period, as we extract the regional valuation thesis, that idea is going to have some volatility along the way,” Mr Millar said.
Elsewhere, some riskier positions were given a more defensive slant. Mr Millar said the fund, which is long global equities via Nick Mustoe’s £1.2bn Invesco Perpetual Global Equity fund, sold futures against global equity markets to offer some downside protection. It also added in a swap spread trade as Mr Millar said the fund needed additional tools to extract value from equity markets.
“Looking at swap spreads and how negative they are, on a two- to three-year view, we expect them to go flat.”
The fund also sought exposure to the Russian rouble as the currency seemed “beaten up enough”. Given the currency’s exposure to commodities, it paired this position with a short on the Canadian dollar.