A bullish stance on equities prompted the managers of the JPM Global Macro Opportunities fund to add more volatility to the portfolio when the VIX was recently at close to record low levels.
The three FE Crown-rated JPM Global Macro Opportunities fund aims to provide positive investment returns over a rolling three-year periods in all market conditions, investing globally and using financial derivatives.
Over three years the fund is up by 30.81 per cent, compared with the gain of 8.86 per cent for the average IA Targeted Absolute Return fund.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The team has a strong approach to risk management but this does not necessarily mean that it avoids volatility.
The biggest theme in the portfolio remains ‘China in transition’, which represents 24.4 per cent of the thematic risk breakdown. Other major themes in the portfolio include ‘supply side weakness’, ‘maturing US cycle’, ‘emerging market convergence’ and ‘Europe gradual growth recovery’.
The manager said favourable economic conditions and a rise in corporate earnings globally have prompted the team to increase equities exposure in JPM Global Macro Opportunities.
The fund currently has an 88.6 per cent physical exposure to equities, reflecting its bullish position on the asset class. Another 5.6 per cent is devoted to bonds, while 5.8 per cent is held in cash.
Strong performance of developed markets over the past year have raised concerns that equity valuations are too expensive.
Portfolio manager Shrenick Shah said: “They’re definitely more expensive than they were this time last year or two or three years ago. But what we do in this portfolio is make sure that we’re selecting companies that have good free cash flows.”
While the fund’s team of managers have become more bullish on equities, they have begun to offset their exposure by adding more volatility exposure to the fund.
“We have started to build a long volatility position in the US,” said Shah. “The market has been pricing in low volatility for sustained amount of time. It’s a good opportunity to pick up long volatility to offset our large equity position.”
The CBOE Volatility index (VIX) – the so-called ‘fear index’, which measures the market’s expectations of near term volatility expressed by S&P 500 stock index option prices – has been trading at low levels more recently.
This has prompted some market participants to suggest that a spike in volatility could be on the horizon as investors remain complacent about markets.
While volatility has been trading lower more recently, there has been an uptick following concerns in markets over an escalating war of words over North Korea’s missile programme, which US president Donald Trump has threatened to halt.
Performance of VIX over 5yrs
Source: FE Analytics
“I can’t say that we’re particularly expecting it to pick up,” he said. “There are two things. The first that the price of volatility is quite a low amount, so the loss is limited. Secondly, it fits quite [well] with the majority of equity strategies that we hold at the moment.”
“We have a positive risk stance. Very simply it is driven by the view that global growth is strong,” said portfolio manager Shrenick Shah.
Shah said the team, which includes co-managers James Elliott and Talib Sheikh, remains positive on the US, where it believes the economy is continuing to perform well as improving labour market figures have recently shown.
Another area that the team have backed is Europe, which has shrugged off concerns over the future of the EU following several supportive election results this year. Shah said domestic consumer demand has remained strong, while the European Central Bank’s policies have not impacted the market as many had feared.
Elsewhere, Shah said the team are positive on the prospects for Japan to continue growing against a backdrop of supportive policies.
The last of the fund’s four themes is China. Shah said the team believe the Chinese economy will continue to grow, despite broader concerns about the economy more recently.
Shah said the managers have an opportunistic view on China, which also feeds into several other strategies within the portfolio such as mining and unloved areas such as automobiles and financials.
One other development within the portfolio is the building of a tactical long US dollar/short euro and Japanese yen position, which Shah said offers the fund greater diversification and reflects the firm’s positive stance on the US.
North America represents a 22.8 per cent of the portfolio’s regional risk breakdown, while Europe ex-UK and Japan make up combined 25.4 per cent.
This trade is represented below by the ETF Securities Short JPY Long USD and ETF Securities Short EUR Long USD.
Performance of ETFs over 1yr
Source: FE Analytics
Since launch in 2013, the fund has returned 36.3 per cent, compared with 2.01 per cent for the benchmark.
The fund features on the FE Invest Approved List for its consistent top performance among its peers and also comes highly recommended by the Adviser Fund Index panel.
“Although the fund has a riskier approach than its absolute return peers (cash plus 7 per cent), we believe the team has the capacity to reach it,” FE Invest analysts noted. “The process has proved its robustness over very different investment environments.”
JPM Global Macro Opportunities has an ongoing charge figure (OCF) of 0.78 per cent.