Absolute Return Masterclass | November 2019

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  • 47 mins 25 secs

Absolute return funds were favourite picks in 2015 and 2016, but recently they have fallen out of favour. Why has investor sentiment changed and is it justified? Offering a glimpse into the world of absolute return with Olga Hay, we are joined by:

  • Jamie Niven, Senior Portfolio Manager, Candriam Bonds Total Return, Candriam Investors Group
  • James Mahon, CEO, Church House Investments
  • James Clunie, Fund Manager, Jupiter Asset Management
  • Aron Pataki, Portfolio Manager, Real Return, Newton Investment Management

Learning outcomes:

  1. The difference between a real and an absolute return
  2. The market conditions that favour absolute return strategies
  3. How an absolute return strategy differs from an index-based approach



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It may contain errors and omissions.

Hello and welcome to acid TV. Master class with me or go Hey, on today we're talking about absolute return. While Absolute return funds have been invested favorite picks in 2015 and 2016 in the recent year, they have fallen massively out of favor. Why has Investorssentiment changed, and is it justified to discuss this and much more? I'm joined today by wonderful panel. Let me introduce them to you. We have James Clooney, ex head of strategy, Jupiter Asset Management. James May in CEO Church, House Investments J mean even senior portfolio manager can dream on our own. Pataki, a portfolio manager, really return Newton Investment Management now. Is it mentioned in my introduction the absolute return funds of not being absolute favorite in, you know, among investors? Why is that, Aaron? Yes, I guess. Asymmetric policy setting that losing when stress developed in markets and field to lean against booms, pushed up asset prices and evaluations. And a lot of investors have regret risk because they missed out potentially on the upside on gas more recently, since we experienced some volatility. So these put four years have actually no preserved capital on the downside, which had a negative impact on the asset class. But I guess it's way enter the U environments, and I think it's not the best time to give up on these strategies. I expect more volatility in the near future, and I think these strategies should do value in the coming quarters and years. Well, Jamie, what's your view? Yeah, I agree with Farren there. In terms of the recent performance, some of these funds have not bean a CZ good as they may have been in the past. However, I think with a flood of money into asset markets, Q E generally has seen old asset classes kind of rise together. A Zoran says the volatility has been relatively low, particularly in in my world, in fixed income asset classes. When we start to see that come back in the future, which I'm sure it will, I think most central banks have got to the limits in terms of quantitative easing on, so there's little more they can do on that side. We should start to see a bit Maur differentiation between asset classes and the ability for absolute return funds to outperform going forward. But when we're talking about you know absolute return funds. I I looked at the trust net just to see what kind of returns have there been delivering last year, and the difference is massive. So the top performing fund delivered 23.3% this year. Great, but the worst performing fund delivered mine T 20 minus 29%. I mean, that's a huge difference. You're down 30% almost on your investments. So is it you also think this is very much down to this? This strategy is very much down to the skill off the active manager, James. Well, I think that points to a definition problem within the Sector two. I mean, clearly, if if you have an absolute return fund and it's moving up or down by 29% quite hard to court his absolute attorney fund in my definition. So I think possibly we have a sector definition problem there as well. So investors certainly do need to be selective on. And I think it's a girl's your first point. I think it is simple disappointment, isn't it? I think a lot off funds just have disappointed they haven't delivered absolute return. So you mentioned very good point about the definition of absolute returns that what do you understand? What do you mean by absolutely? I'm in positive, rolling absolute returns every year. So every we define it as positive returns over rolling 12 months periods, I condition. And then it Andy conditions yes, clearly related to risk free interest rates. Eso Ritter Positive return over risk free rates is what I would expect to see from an absolute return fund and then James positive returns. So what are you looking to deliver? Yeah, I think our job is to take calculated risks on sort of position ourselves to try to make positive returns over some sensible period. And I think the sector definition under the I am a is 1 to 3 years. But effectively, what we're saying is, if you take risks, you can lose money, but you're aiming to make money over some sensible time horizon. Um on. It's not fully controlled Mrs Risk taking, but at the same time a sensible gold toe have an absolute return manager and Jamie in terms of when we're talking about fixed income on delivering absolute return, I looked at your funds. You have a mixture of pretty much everything. Just like any other fixed income portfolio manager would have. So what makes you different? What? Why? We're talking about absolute return here. Yeah, I think, um, absolute return funds compared to a benchmark funds has a bit more flexibility, a bit more of a dynamic nature and can move more between the asset classes. So I think from an absolute return funds, we also generally will will have a lower duration. You would find eso. In recent years, benchmark durations have increased substantially. Yields have come down so that the carry you get from fixed income investments is much lower than the past. So to protect, protect when at some point we may see this bond selloff which granted people been speaking about for many years now. But there's not that much to protect those fixed income investors anymore with a savory low yields on very little carry, even on credit as well. Aaron, you're running a really return fund. So I think there is also some sort of confusion and industry riel return and absolute return. When I've read the description, it says it's an absolute return fund. So just explain to me, you know, what's the difference and how do you use this? Sure. Well, there are differences between real returns and absolutely turns me Ritter and is return in excess off. Inflation is often used video in real acids that tend to produce an inflation plus type return gas. Absolute return is an outcome based objective now instance, while case it's live with plus 4%. But there are similarities between the two because actually Leiber plus 4% on our P I plus 4%. For example, in the UK contacts for a longer time periods are or have produced very similar returns on gas both of these time for strategies. Try to produce stable, predictable returns through the cycle without significant draw downs. And in that sense, they are actually quite similar. Do you often see those questions coming from investors when they ask you to explain, You know, this absolute returns strategy is there. Do you think there is a lot of misunderstanding by investors what the's Pontes means? Yes, and again that the universe is quite broad. That one end, you have probably hedge longtime strategies that used to relatives on long, short relative value time strategies to generate absolutely tones. And at the other end you have problem or trance parents in poor strategies that invest in traditional asset classes. So is truly a board universe on dhe. Because of that, you have quite significant differences in terms off returns in the short time believing in the long term. But they do share a single objective, which is to generate an absolutely turn overruling 12 or rather three year periods. And in that sounds, they are quite similar. Or you can achieve that objective in many different ways. So and if we're talking about the performance of your fund this year, how has it been so far? Yeah, the real time strategy produced a very strong return this year, the year to their performances around 11% gross of fees on gas. That's because we had a very cautious for you off the world into 2018 De Viscount Multi Asset portfolio. An increased duration quite substantially. Att. One stage. In the first quarter, we had nearly 20% exported to the U. S long bond and also 15% exported to gold gorge related investments and these safe haven assets in a falling riel rate environment performed very vow, and at the same time, risk acids produced significant positive returns as well, because they anticipated more for this. Its stimulus from central banks on that pushed up valuations and prices. So we benefited on. Both sides are safe haven assets that are useful hedging produced a strong positive return. At the same time, risk assets on the other side produced a strong return as well, and and Jamie will be talking about the macro environment. We've recently seen a lot of negatively yielding bonds, and it's so much more difficult, probably do you feel, especially if you're in the fixed income just in fixed income? So where do you find that you can, you know, get the returns from on? Do you hold any negative yielding? Yeah, there's a very good question and the question that comes up a lot from investors, in fact, with negative yields. And actually my fun, particularly is a euro denominated fund. So the base rate is minus 40 basis points S O way actually are environment. Where is a struggle to produce Carrie and produced a positive return? We try to avoid negatively yielding instruments. So are our biggest short position is actually in the German Boone's where we have significant shorts on. We look for other areas which are more positively yielding. So, for example, we have some although small exposure to Italian government bonds, which and do you have, ah, spread of kind of 100 50 basis points over Boone's. We also holds Treasuries over Boone's were long Treasuries and short bones because again, we get opposed to return there, although arguably not when your hedge back to euro on dso. We are finding it a struggle in this environment. But actually the ability to be dynamic and to move around and find the best opportunities negatively yielding are only negatively yielding if you hold them to maturity. So we can still see appreciation in price s o from negative 10 basis points to negative 20 you're still gonna pick up a positive return and so that's where we're using it. The dynamic nature of the fund enables us to be quite kind of mobile in the asset classes on dhe negate the negative yielding returns. And James, you are running a multi asset fund, but you have a lot of bonds when I could see the proportion. And this seems to be that you have you holding a lot of triple A swell, so very cautious approach. How has that been? Can you just tell me a bit more about your fund and your approach? And how has it been working for you and delivering returns? Certainly. Just drop in my 10 pen a thon. Negative rates to is the thing that strikes me. Is this such a rubbish policy? This is just having such a terrible impact on German saving rates are going up through the roof dramatically have been completely the wrong effect. I just think it's ridiculous policy. Anyway, I'm sorry you asked me about my father. Yes, we are, indeed where a multi asset class fund. But given the heart, our objective is absolute. Returns at very low levels of volatility were always. Band have a high proportion in Barton's because we like the compounding of bonds clean as but they don't deliver well. The department moment, of course, is that real rates have gone so low that we view things from the perspective of risk. So as rates collapse, we just don't see an interesting opportunity. So we move certainly shorter so our duration at the moment is around 1.4. So absolutely, almost on the floor. If you like on DA. Our biggest exposures to floating rate notes where we can still get reasonable returns on where we have a hedge against rising rates are view would be that, quite possibly, rates have bottomed. Now we think End of all Western and beginning of September for UK guilt. We might finally have seen the bottom for AIDS. Jamie, about a mix of yielding, being such a bad policy, and I actually think some central banks are now starting to appreciate that. So you see, the Swedish Ricks Bank recently were desperate to get back into positive territory in terms of raising rates are are desperate to Andi. That's despite the micro economic backdrop. So I think some central banks are starting to appreciate the negative rates, is not a good policy and actually need to get back to post of territory soon. Obviously, the CV of cut rates recently, Andi something they might go again. I suspect they might try and avoid that, to be honest, because because I just say German saving rates, et cetera. It's not a positive backdrop. James L will get you the way I thought. Just one second. Aaron. I know you also. You know, you also have bones exposure in your portfolio. Do you hold any negatively yielding bonds, or do you see any point in holding them? We don't currently negatively yielding Boynes borns, but I can see the attractiveness affording some of these instruments for various different reasons. A. That actually hedge yields matter more than normal years in general was So, for example, in the 1st 2/4 off this year, if you hatch, they burned position into dollars than investors could pick up additional yield on that compare to investing in Treasuries. And I guess capital appreciation can offset the drag off negative yields. Andan some countries where the shape off the CO was deeply upward sloping, devolved, down generated a significant capital returned as well. And I guess in a multi acid portfolio, contacts, borns, even if they healed negative, can produce portfolio diversification benefits and can be used as a hedge against crab. It and a critic positions on. They can also be used. There's liability matching on DDE. In some countries, there's no other alternative. Some banks started to charge negative interest rates on deposits greater than a 1,000,000,000 euro. And I guess those investors could be pushed out on the whisker and could find negatively yielding borns attractive. But I do think it was about that these policies just don't make sense. And actually, the negative unintended consequences off them are quite significant. Jane, I really got to you. But she's just very interesting discussion. But thank you, Thank you, thank you. You're running the Jupiter Absolute Return fund. Tell me about more how you're running it. Sure, So it's fairly simple. We pick stocks around the world long or short on Ben. We simply look at what we've got on really find. We have lots of risks as a result of that stock picking on dhe, much of it a stock specific risk. We're happy with that, but some a sector risk or country risk or style risk, and we might add some simple hedges to try to make the equity long short book more robust to really quite a simple portfolio, some long some shorts. It'll be a balance and then some simple hedge is not so simple to run. I'm sure that's quite challenging because one of the things we like to do is we like to buy stocks that we think are cheap relative to fair value in sensible quality. Okay, balance sheet. And we like to short stocks that look dear with a reason to go down now. And that sounds to me like an awfully sensible process. But sensible hasn't actually been a good strategy in the last couple of years. It's actually paid to do the very, very opposite to actually shun many of the cheap stocks and actually go for in some cases, lost, making sort of hyper growth cos it might be beginning to change, I hope certainly hope so. But it's been quite challenging to execute us a sensible, simple process, but onto taking much more risk by going sort of against the market in the sentiment. So in a sense, if the market wants to take a stock above its fair value, then then there's two kinds of respect. There's one the risk that it reverts to fair value or there's the other risk that it keeps going, and usually it tends to keep going for a little while, and most of the evidence is, they tend to revert back later. So there's this to kind of risks at the same time, on usually, when we're shorting a stock that appears to be above fair value, we look for a catalyst, a reason for it to fall now. So earnings downgrades, for example, or perhaps our business challenge or over aggressive accounting. So the catalyst is intended to deal with the momentum problem. But actually, you'd be surprised some stocks can actually be deer with reasons to fall and still go up. It's been quite an interesting market the last year or so. Give me some examples off your short positions right now. Sure, so we're short a number stocks that we call zombie stocks, which sounds comical. But actually there's a clear definition of zombie, which is any firm where the interest charge each year cannot be met from the earnings before interest tax. So in other words, they need constant infusions of capital to to continue their their lives on. That's included stocks, for example, like way fair and uber and lift, which look glamorous on the one hand. But actually, when you look at the account in, look at the metrics actually quite horrendous. So has been one class of stock that we shorted. We shorted a number of other glamour growth stocks like Netflix, for example. We have a number off food cos we've been short of over the years. So Kraft Heinz are Anheuser Busch and Beer or General Mills or Kellogg. And these look like slow growth challenged cos sometimes with aggressive accounting or too much debt but a valued like they're safe defensive stocks with Big Moz. So the whole variety of different types of short on that diversity of shorts hopefully gives us a little bit off. Ah, balance across the portfolio. You seem to be a bottom up. Yes, but nevertheless, you know that the whole macroeconomic environment the Fed, you know, cutting rates this year quite a lot, you know, and the CB full of ensued. How is this affecting you? Still not in the vacuum, you know? How is this affecting your select? Sure. I mean, I think the negative interest rate discussion we had and it's very relevant, it is a little bit crazy. It's not investment to buy something. Whether guaranteed losses is something. But it's not investment in the purest sense, so we have to deal with it. We pick the stocks, we look at the risk, we're exposed. It, we think, Do we want to hedge against that? So we want to hedge against central bank craziness. Will throw in a bit of gold, a physical gold, E T f. Or something like that. As a hedge against that, if you want to hedge against deflation or inflation or currencies, we can create simple hedges there. So we do a bit of hedging. But sometimes, actually, the stocks that you pick, they are sending you a signal organically. They're sending you a signal, and you actually want to be exposed to those risks. They may not work out for a period of time, but this should work out over some sensible time horizon and then staying on the macro economic environment. And what's happening now in the world. Loads of uncertainties, that's for sure. James, how do factor it into York, you know, decisions? Would you look, you know how important is a macro? Basically economic situation to your stock picking it isn't and born. Of course. It is simply a background, really. We do start from the bottom up. We only invest where we think we can see value a nen vestment individually that's going to meet our our criteria. Hence, in sort of climate we've had over this last year, we've been getting steadily more defensive simply because they just have to be an attractive investments on offer. When I obviously I'm not going to invest in negative yielding instruments, but identically want to invest in 10 year rates that when they got down to 33 basis points, it's just nonsense investment. Hence we we moved much board cash, but if you like, we build from the micro. The macro is an interesting backdrop, but we definitely build from the micro where we think we can, where we can add value. We can't really add value to the macro on Jamie. I think that's been more important for you. The macro outlook, isn't it? On dhe What's your view? Do you think you know, being here in different opinions and everybody was asking, You know how soon will be going to see a recession, but we definitely see the economy slowing on way. So what's your view? Yeah, I mean, that's a big question. Evans lips isn't it? When when's the next U. S recession? Is it gonna be 20? 20 years? They're gonna be 2021. In reality, I think we certainly are slowing. As you say. We have US growth at 1.8 for next year s o around trend, but we don't see a recession in the next 12 months. Um, I think that the trade wars was a very important development and very important aspect to the forward looking environment s o. The recent kind of more positive backdrop that we're seeing from from Trump's rhetoric and the Chinese rhetoric certainly suggests that we might have a delay to that recession question. But I think we've We did see some slowing in the data, particularly forward looking indicators of the likes of the I s m manufacturing non manufacturing in the U. S. Likewise, PM eyes globally. However, we have seen that stable lives on dhe people, and I was saying, Oh, we're gonna see the pickup. I wouldn't be too sure. Yet we've seen a stabilization. We now need to see what happens in the next in the coming months to see whether we see a global growth pickup s O for me. The U S. Stable next year. The rest of the world is still a question mark, and we're still relatively defensively positioned going into into the new year, but with a kind of positive signs. Andi ability to other said earlier. Moved. Anamika, Leanne increase our risk If and when we do see risk markets come back, the only other thing I would add actually is on bonds, and everyone was saying, Actually, markets are priced for a positive backdrop on bond market price for a recession. We started to see that correct in recent weeks on our suspicion is that if there's gonna be any big moves, it's going team or on the bond side, where the bond market starts to price the more positive backdrop, whereas equities had already done so. Aaron, how is this affecting your decisions on what's your view on the whole macroeconomic environment? Very in right now? Sure well improving economic data surprises and positive useful around Brexit and trade is no material changing out cautious outlook, especially given the fact that risk assets activities in particular rallied almost 10% since the August lows. Improving economic data surprises point to a less negative growth outlook. This is true, but that partially fracked e combination off more barrish analyst estimates and only mildly improving equal big data. And in our view, you know, it's ah, it makes sense to maintain a cautious outlook because Global had Vince off sat US domestic resilience. And to us, it seems like monetary policy remains the gore to poor Lisa Prescott. Prescription even do is becoming less and less effective in offsetting slowing growth. And it is true that Miss Eades and Progress in trade talks and that boosted sentiment. But that doesn't change the fact that probably seen an inflection point in globalization, probably sometime in 2017. And we'll see more protectionist measures which will have an impact on global trade and also multinational companies their supply chain. So there are quite substantial profound investment implications off these, and I guess turning to Europe after e. C. Be delivered on monetary policy stable is Lord the deposit rate even further also introduced quantitative easing conditional to inflation expectations that we see in a tearing off bank reserves and of course, thes or help sentiment in the short run. But if you think about it is a 10 business point cut in the deposit rate combined with high amount of ownership off government bonds and other fixed income assets are going to change the growth prospects of Europe, Probably not. Andi now view monetary policy really reached its limits on what we need is sort of monetary policy easing combined fiscal, still others to support growth. Actually, that's what I was gonna ask you. Do you think that happening next year, for instance, with Christine Lagarde E. I still think that a Europe at the prospect off a coordinated fiscal stimulus package is quite low because the politics is very fragmented. And I would say, probably in the UK there is a high probability or for a more substantial fiscal stimulus that could boost economic activity. But again, that is likely to lead to higher deficits. Richard goingto have a negative impact with a longer term, probably on James. Do you agree with that? Do you think we're going to save it? More moves towards the fiscal fine. Well, I think I probably agree with, Unlike are saying that yes, it's good idea, but is that gonna happen? I'm not sure. Perfectly in Europe. I just dropped him. One comment on Trump on the trade talks, of course, but no idea what Trump's going to say next. But I'm not sure that it's really appreciated that the Chinese don't mind. They're actually quite like the excuse for their economy to slow. And they've been looking for a way to slow the Chinese government. And it is such a huge economy. It can't keep gray at 678%. They have to slow it down. And having an excuse off Trump and all his actions is Mother. I think his manner for them, they love it Excuse absolutely allows him to slow the economy down. Question thing you point that you brought it. Do you agree with that? I think there's an interesting perspective. I think a CZ well as the trade sort of tariff shenanigans. I think it's probably a longer term story about the U. S. Vs China on. We've seen that in Vice President Pence's talk about a great power struggle on they had from different social and political values between the two blocks, so I feel that maybe some countries will have to choose a block. Some companies that operate across China and the U. S. Successfully. Maybe the Nikes and apples in this world might have to choose sides or become a little bit more technical and the marked in, rather than, say, emotional appeal across two different blocks. We'll see how it plays out. But it could be the start of something colder and frostier than just tariffs that come and go. We'll see. We'll see what happens. You appeared on this master class before and I just washed it. And you were mentioning that you're waiting for this catalyst when we're talking about growth versus value stocks on that, hopefully soon we're gonna go back to value now, some months later on we're now here. Hasn't really happened. So what's your now? Yes. So the value growth jaws, as it were, actually got to really extreme levels around about April time and have closed in a fraction. But really no, no great shakes. So where was still at? One of those sort of great divergence is things that get value versus growth back again. What one of them could be economic growth and, as we've discussed, doesn't look too exciting around the world. Another, though that's quite interesting is, if they were reflationary impulse, then that's the opposite of a deflationary mindset and deflation reminds that seems to have helped some of the sort of expensive defensive stocks on the talk about Christine Lagarde or Sergey Java talking about the end of austerity. Even the Japanese reported in The Financial Times. We thinking about fiscal stimulus? Could trump do something ahead of the 2020 presidential elections? We'll see. But there's definitely a lot of political talk about sort of spending government money on projects, and that is a reflationary impulse. So if there should be traction and if there were some traction in Europe, which you know, we don't think it's likely. But if it could happen, that would be absolutely a sufficient catalyst to get value out performing growth. And, of course, from a next Doreen starting point, the results could be quite interesting. So the conditions are our favor in, ah, bit of tilting towards value that that the history suggests you mean reversion should come. We'll just see how it plays out. And obviously there is a lot of political risks, as we were just discussing this, and how do you hatch those political risks in your portfolio? Um, Jamie, Yeah, I'm political risks or a difficult one, right? Because they're binary. It comes from more often than not, So whether there's gonna be a hard Brexit or there's gonna be a deal, whether trade war is gonna be resolved or we're going to go to further tariffs. So we prefer not to play specific. Leave those risks, take a bath in a binary outcome. Rather, we'd look for trades and ideas which may work in both scenarios or when things become extended. So, for example, with Brexit, we thought that a short guilt position could work in both outcomes. So whether that be on that short gilts at the 10 year point and maybe a bit further out on dhe, that's whether in a hard Brexit where we may see rating downgrades, we saw that the reduction to make devout Luke last week or indeed further fiscal spending. We've mentioned both the conservatives on the Labour Party and their manifestos. We're talking about greater fiscal spend, so that could be negative for the longer end of the guilt curve. Conversely, when a deal scenario, guilt said kind of overpriced bank of England, further easing on. Therefore, in a deal scenario where the kind of risk backdrops bit more positive, we can see guilt sell off a CZ well, so we like trades where we're not taking a bet on that one binary outcome in terms of political risk. And how do you get hedging in your portfolio? Yes, it coming back to the same topic. I think geopolitical risks are extremely hard to forecast. Instead of doing that, what we tried to focus on is getting the bigger picture of you, right? So we use a thematic approach to highlight key structural trends that are most likely to influence stock markets and economies. And that thematic approach is very useful in filtering out noise and helps us to fox on these key trends and in terms of hedging GAM. Since we have a multi acid 40 year, we can use different levers in the fund to hedge risks. Have you been using some simple derivative positions that they can't the market beat off the portfolio and we're not comfortable with high level off market risk? He also used indirect currency positions more lately. For example, a long Japanese yen short you're a position that carries positively to offset equity and credit risk. B also used duration at the beginning, off a year has mentioned he had nearly 20% of the fund invested in the U. S long bond, which were used as an offset against the risk assets, which will really well. And the fourth main lever is called rich with think off as a could hedge against the range of outcomes. Gold is a very good hodge against policy. Arrows currency, the basement, which has been a dominant feature off the backdrop over the last decade. It's also a good match against in fishery outcomes on dhe, geopolitical daily bands and what differs in gold. Competitive with these hedging instruments and physical cash in general is that it's no one's liability. There's no part off the credit system. Therefore, it can be used as a hedging instrument against credit. Stress it cannot be printed has been acting as its total very full, very long period of time. On dhe, we think in an absolutely turn contacts that can be used as a portfolio diverted fire. James, you don't hold any gold as far as I can see from your portfolio, so obviously you don't take similar approach of view on it. I think first, I should just observe that was slightly alarmed. To hear that you have to be watching what I said last. No, we're not holding any gold at present. We we tend to work on the basis off. We like to find attractive assets, individual assets to invest in. And we do like Kari. Obviously, girl doesn't have any carry. Clearly, it has a diversify impact. But for now we find that the Carrie we're getting from placing rate notes suits us better. And as far as the political backdrop is concerned, clearly it's extreme at the moment. But it brings all eternity and then way. Welcome volatility. We look forward to the next part of our ability. That's where we find the first opportunities. On what role do convertibles playing your portfolio have we liked convertibles? They have the right thought profile for us if we assume and we buy them as bond things, which we do, S O. C. We, we will always will buy a convertible where we're happy. But the credit risk on where we're happy that it pays its way as a bond so that the convertible element, if you like the call option element, is in essence in there for free. That's a risk profile that we like. So it limits our downside risk but gives us give us a scope her. Enjoy the upside, Andi James in this political uncertainty in the whole micro environment. What? How did you find her? You finding emerging markets Because I can see on your portfolio that you hold some in Russia, for instance, on some other countries. Sure. So I mean the Russian investments we board a number of years ago, if you recall sort of 2013 14 15. There were a lot of challenges for Russia oil price collapse and then sanctions over Crimea. So Russian assets actually got to a point where they looked extremely cheap, probably the cheapest asset equity assets in the world for clear reasons. So we thought, well, very well known concerns, very cheap assets. If you buy them and hold them of a reasonable timeframe, maybe something good will happen. There was certainly price that way. Well, finally it's happening. S 0 2019 is one of the better markets. It's been one of those investments where you look at them and say, Well, actually, that's a good stock, you know, Sensible balance sheets, sort of sensible management. Really cheap stock, decent dividend yield. But it's Russia on now. I see what people are saying is, Well, actually, it's a sensible stock with a bit of growth, and it's really cheap and started to go up. And, yeah, it's Russia, but you know me. So the mindsets changed, and I think that's what can happen, actually, and in a sense, it's kindof like what we talked about earlier. Our job is to take care of federal risks with an aim of trying to make money over some sensible time horizon. Sometimes it's one year, sometimes is a bit longer, but finally the Russian assets and moving on. That's that's good. I can see you have gas from here. S O. Gazprom was the cheapest stock in the world for well over 10 years. A huge company. I had a 6% dividend yield on a P E of about three or four, and everyone said Well, it's Gazprom. A huge amount of the cash flows are actually spent on projects at the state's behest and that money's probably wasted. While they changed in the last year, the payout ratio on dividends from 10 to 20% and no surprise the shares doubled because, in a sense, that's such a doubling of the money with shareholders get rather than get spent on on, perhaps of advice projects. Andrea still looks cheap. So for years we collected the dividend, shares just drifted, and then finally they double and actually a total returns been sensible. So I've not enjoyed owning Gazprom a tall for the 1st 6 years. But actually it's beena nok investment. It just it just takes a while for these things. You have quite a few oil and gas stocks, not just gas pram. When your portfolio and the natural question that comes into my mind when one of the themes you mentioned thematic investment in all of that is he s g. You know, an easy person in sustainable farm with a Wait a minute. These are no good guys. You know, they're no ticking the boxes, especially on the e u know. How do you deal with that? So we think of the SD as, ah risk factor and everything we do on when we sort of split up portfolio between longs and shorts. We find that the longs versus shorts that the longest and have better governance, probably better social factors. But that's, ah, sort of debatable, qualitative thing on because we have a number of oil and gas stocks like gas problem moment. We're slightly below average on environmental taking us a hole. There is a tilt towards positive VSD on the long side versus the short side, so we measure it. We think about yesterday's a risk. So with the oil stock long so stocks like BP or Ecuador, for example, these firms do have programs for improvement there. Very conscious of the issues, we think they're well resourced, well managed companies. But there's a risk factor there. I think they're definitely priced for that risk factor. These Lashley look to be reasonably cheap shares in a world where most things are overpriced. So it becomes a trade off between, okay, they have issues. They have a path to improve on their price, like they have issues. What do you make of that on? We've taken in some cases the decision to actually go long of those stocks. Over the years, we've been long and short variously different oil and gas dogs on the island. I can also see someone of gas stocks in your portfolio. How do you so in terms of the E s g, How does that meet? Sure way have a fully integrated the SG process at Newton. And you think, you know, as an industry, spent the off a lot of time looking at financial statements, balance sheets and so on, but very little time looking at a yesterday profile of companies and industries. And these reports obviously contained little off financially material information that is often misunderstood and last standardized on that creates market inefficiency and also valuation anomalies that activity masters can size up on in terms off the process. Be obviously rate all off our securities in the real return portfolio on both or three factors. Yes, G, but we don't use it as a exclusion policy. Views it as a framework to highlight non financial risk and also impact change, which is very important because ultimately that creates long term shareholder value. So we do you consider it. However, the prime of chapter in the real a Temple Folio is to generate strong returns. Considering SG factors now we do offer to our clients obviously other port for years and years. G considerations are at a higher level. We do have the traditional SA report four years that you have exclusions and also sustainable funds. There. There is a dual objective generating strong returns on ovary defined time period, but also I'm focusing on positive environmental and social outcomes. But those would be the sustainable port four years and induce funds we do not or the gas companies and Jamie are you finding the job is just a ticking books exercise. It is actually not a toll. Can Dream is taking very serious seriously. We have a company wide exclusion list for companies involved in certain activities. So any companies involved in land mines, cluster ammunitions, biological or chemical weapons anything with over 10% of revenue and thermal coal, or actually 5% over 5% in tobacco are excluded from all portfolios within the company. So that's a no matter what the the risk return or the outcome profile of the portfolios. We do have specific as our funds, which are based on a further exclusion policy for SG factors within the fund that Iran can dream monsters return is not an answer. I funds. However, yes, G factors are integrated into the bottom bottom up process of the underlying credit teams when selecting individual name. So while it's not an exclusion policy for that aspect of it for this portfolio, it is certainly integrated into the investment policy on James for you, is it? Helper is a risk factor, something that shows you to risk war. Uh, is it help? I'm not sure. I'd call it a help. Like it helps you to understand. You know, the level of risk you're potentially carrying we would weigh would always engage with cos we always have engaged with companies on. We've always automatically excluded cos if we didn't like their corporate governance or didn't like sort of businesses they're involved in, the other one has been careful with these definitions. You've been doing it for years anyway. Exactly. So I'm now we have to score it. Andi. What? We appear to score double A, but I I'm not quite sure of that. Confident in the process is yet, but, um, I'm worried about this exclusion notion in that it is or it can be to encompassing is clearly we must look to some of these big companies. One must look to shell to be a leader in actually cleaning up what it's doing and providing clean energy on. I think just to exclude Shell because it's so in the gas company is a mistake. I mean, clearly, there different companies taking different view. One has toe have has to look at this. But yeah, Dr Decker Aaron's point that our principal responsibility is to our plants and our investors. That's really where we're on. We're almost out of time. But I'd like to hear your final thoughts on maybe perhaps in your final thoughts. Um, outlook for 2020. James, I think we should expect change. That would be a good thing. It's gonna be a really interesting here, really untrusting. So what we're gonna do is continue to execute what we think is a sensible investment process, and the results will be what they will be. I think you're right. Well, yes. Agreed. Certainly an interesting year opposite a lot of politics to play out. Hopefully it will play out. We won't end up with another hung Parliament s O that that's going to be very interesting and we hope will provide opportunities. I do worry about, particularly the long end off the fix interest markets. I think a lot of low coupon, long duration paper has been issued, and that is much higher risk than I think many investors appreciate. But I feel since I do think we have bottomed out in the bond markets, I feel encouraged. And I think with high returns next year we can look forward, just echo something James said. There about duration risk and actually just to reiterate that the extent of duration risk that some benchmark products actually have so absolute return products can help investors benefit in that environment. My outlook for next year, I think Theo Interesting thing to watch is the U. S presidential election, Um, on whether we get the re election of Mr Trump or maybe someone Maur like Elizabeth Warren, which won't necessarily be good for risk markets. I don't think Mr Bloomberg potentially, Yes, indeed. So, yeah, there's there's plenty of political on dhe macro issues to get through next year, but I'm optimistic but cautiously optimistic. I would say I maintain my cautious outlook for 2000 and 2020. Andi. I think the market is now pricing in a clear inflection point. Andi, I think the turnaround may not be a strong er's, as investors anticipate. I was to think that we re sat in a structured law growth environment, which returns are going to be lower than equal on the quarter to get a higher than before. Therefore, de risking solutions, absolute return strategies would be very well suited that are likely to produce the best. How come for investors? Well, unfortunately, that's all. We have time for now. But stay with us as well. Tell you how you can use this master class towards your CPD and all that remains for me is to thank our guests today. Let me remind you, we've had a James Clooney head of strategy. Jupiter of Asset Management. James Mann, CEO, Church, House Investments J mean even senior portfolio manager can dream on Aaron Pataki, portfolio manager. Really return in mutant investment management. Thank you very much for coming today. That's all for now. By the end of this video, you'll be able to understand and describe the difference between the rial andan absolute return the market conditions that favor absolute returns strategies on how an absolute returns strategy edifice from an index based approach please fill in the reflective statement to validate your CPD.