Central banks, who should be the guardians of stability, are playing a disruptive role in financial markets that could spark a prolonged period of volatility, according to Miles Geldard and Lee Manzi, co-managers of the Jupiter Strategic Reserve Fund.
“Volatility can spell opportunity, especially in an already choppy currency market, but can also prove challenging; limiting the risk of capital loss is always our key objective as we look to generate long-term positive returns for our investors,” says Geldard.
Geldard and Manzi, who have managed the GBP124m Jupiter Strategic Reserve Fund since its launch in April 2012, have long expressed scepticism about markets trust in central banks’ omniscience and their ability to remove volatility from global financial markets. It is a view that has helped them deliver a return of 9.74 per cent over three years compared to a return for one-month Libor, its benchmark, of 1.5 per cent over the same period.
Geldard and Manzi invest in multiple asset classes on a global basis, seeking to profit from opportunities in both developed and emerging markets.
Geldard’s view is that investors should prepare for uncertainty. Central bankers are taking more and more aggressive approaches to support growth and encourage investment in risk assets, which are likely to have significant consequences going forward. The Swiss National Bank shocked the markets in January when it decided to uncouple the Swiss franc from the euro, sparking the largest intraday movement of a currency in the Bretton Woods era. In the first five weeks of the year alone we saw interest rate cuts from the central banks of Australia, Canada, Egypt, India, Pakistan, Peru, Russia and Turkey. Furthermore, changes to the political status quo, for example, resulting from the election in the UK, may redirect economic policy.
For co-manager Manzi, these currency swings resulting from unpredictable monetary policy can presage volatility in other asset classes: “Sharp movements in an exchange rate can create adjustments in other markets. Asian companies with dollar-denominated debt, for instance, can face repayment pressures from a rising dollar. A stronger dollar also increases the risk of an unwinding of the massive carry trade in credit markets that has been stoked by six years of zero short-term rates in the main reserve currency.”
Against this backdrop, Geldard and Manzi believe they can take advantage of the various currency misalignments to seek to boost returns in their Fund, while seeking some insurance against bursts of volatility in other markets.
They retain a core of short-dated, less volatile bonds with a modest holding in convertible bonds.
Equity exposure is mainly through a portfolio of holdings in US, European, Asian and Japanese stocks. Miles and Lee think Japanese companies in particular are likely to remain attractive investment opportunities as they progressively become more shareholder friendly.
Their Fund has benefited from their view that the US dollar is likely to appreciate further as a resilient economy there prompts the US Federal Reserve to raise rates sooner rather than later.
Conversely, the managers have taken short positions on a number of other currencies such as the South African rand and the New Zealand dollar where respectively a weak economy and the headwinds from a slowing China suggest to them that these currencies have further to fall.