European equity manager Mike Clements has been investing in ETF market-makers and related industries as he seeks to position for a resurgence of volatility from recent lows.
Mr Clements, who works on Syz Asset Management’s £95m Oyster Continental European fund, said volatility, which fell to a multi-decade low earlier this year as measured by the Vix index, was set to return to markets.
“Volatility has been weak but we think that’s short term and volatility over the next five years should move to higher levels,” he said. “We are looking at ways to play a pickup.”
As such, the manager has been adding to a position in Flow Traders, a firm specialising in high frequency trading and making markets for ETFs.
“It’s the largest ETF market-maker in Europe. It’s interesting for two reasons. In the long term you get the shift to passive from active – you get a tailwind because the market’s going to passive,” Mr Clements said.
“But the [other] interesting thing is ETFs are mainly used for tactically shifting asset allocation. When volatility picks up, people go mad and start buying and selling left, right and centre. One of [Flow Traders’] best days for trading was after Brexit.”
Another company Mr Clements has identified as a possible beneficiary of rising volatility is long-term holding Deutsche Boerse, whose derivatives business has exposure to market volatility. At the end of April, the company represented a 3.8 per cent position in the fund.
Elsewhere, the manager has continued to back holdings he deemed attractive amid concerns about Italian bank Monte Dei Paschi last year.
“In mid to late 2016 we were looking at Italian financials. Banks were under pressure and the Italian banks were an absolute disaster,” he said. “We looked at who was making money [from this situation] and it was hedge funds. They are buying those [banks’] distressed loans at good prices.”
Using this rationale, Mr Clements initiated a position in Euro Castle, a closed-ended fund that invests in non-performing loans.
“If you are a hedge fund and bought those loans, you have to collect that money,” he said. “You outsource the collection and would probably have been outsourcing to Euro Castle.”
The manager also invested in Anima, an asset manager that used Monte Dei Paschi for some of its distribution.
“They were going to lose some assets and the shares were under pressure,” he said. “Since then, the share price has been recovering because the Monte Dei Paschi situation has improved. Also, Anima has had some inflows.”
Similarly, Mr Clements holds Banca Sistema, which specialises in factoring, a form of debtor finance.
“They were cheap because the word ‘bank’ was in their name. It was seen as an Italian bank,” he explained.
While the manager has been funding investments using inflows, he has also been taking profits on positions in the energy sector.
In the first quarter of 2016, the manager increased exposure from 1 per cent to 10 per cent as a feeble oil price hit company shares. This was expressed using holdings including Riverstone Energy and TGS Nopec.
However, an improvement in the commodity’s price has since led him to reduce exposure, to around 4 or 5 per cent.
“We were hoping the oil price would stay at $27 and the market would just capitulate. There would have been all sorts of businesses in trouble,” he said. “We made good money, but it felt like a missed opportunity.”
According to FE Analytics Mr Clements’ Syz fund has returned 54.6 per cent over three years, compared with 40.9 per cent from its IA Europe excluding UK peer group.
IN NUMBERS
9.4
Record low in the Vix index, reached on June 9
35
Number of days since 1990 that the index has been below 10 – half of which have come this year
