Michael Kelly: To us, it's vital because if you want to deliver high total return and move away from a bumpy relative return world and smooth the ride, you need to recognize that in the intermediate term, risk itself changes. In an evolving, changing world, we think you need to be dynamic, which does not mean short-term and tactical because those approaches don't have a high probability of success as they are insensitive to fundamentals. We believe fundamentals are more predictable than those measures used in making tactical decisions.
Nicolas Gaussel: We agree on the need to be dynamic because the risk opportunities of each asset class vary over time. If you look at correlations, they can change dramatically over time. So at one point in time, European equities can mitigate the risk of Japanese equities, while at some other point in time, these two can be highly correlated.
You have to make a choice as to whether the risk – and the performance – of the portfolio should vary over time or not. Most investors want to stabilize the risk and the performance, so then you have to adapt to changing conditions. In our flagship Lyxor absolute return multi-asset strategy, the series of returns is very stable. This is achieved with a very different level of diversity in terms of asset allocation in each year, which enables the fund to benefit from the complete economic cycle.
We are very dynamic, we follow three steps to construct our portfolios on a weekly basis. First, on a weekly basis, we look at our neutral positioning, and how we view the risk of each asset class and its correlation. In this way we size up the relative risks of investing in each asset class. Second, we consider our own views on macroeconomic and price signals. For example, in January and February 2013, we felt the risk of a hike in interest rates was high, so we trimmed our bond exposure. Finally, we look at the portfolio overall and adjust it to maintain a stable amount of money at risk so as to seek absolute performance while limiting the risk of negative returns.
Tam McVie: We may be longer-term investors, but we still think it is very important to be dynamic. For us, this isn't about high frequency. But things do move quickly occasionally and you have to be able to react. There have been times when we have moved quickly, usually taking profit rather than taking positions off for risk reasons.
You have to think about the changing environment. So for example thinking about duration. The prospect of what you can earn from the U.S.10-year is very different than it was four years ago, two years ago and even arguably a year ago. You have to think about forward-looking return opportunities. It's about not being rigid in your thinking.
So do we know what's going to happen over the next couple of months with U.S. Treasuries? Not really. But I think it's a reasonable assumption to think that in three years, the U.S. 10-year is going to be yielding more than it is today. So on a forward-looking basis, we don't think you're going to make money holding the U.S. 10-year and we're also not sure that it will provide the same diversification going forward. So now you need to think about whether it will be possible to make money on a relative basis. Today we are positioned long European bonds while at the same time being short a combination of U.S. and Japanese bonds.