January 2020 - Coronavirus: Where's the pain? - Systematic Fund Manager's Comments

13 February 2020

Thomas de Saint-Seine

Asia under scrutiny

The rapid spread of a deadly virus from China remained at the forefront of investors’ mind, exposing the fragility of global markets. Concerns that this outbreak could develop into a global pandemic halted a seven-week rally in EM equities, but with China’s markets closed for New Year holidays, the contagion into wider Asia was perceptible (with Hong Kong and Taiwan taking the brunt of the panic selling). Despite a rising death toll and an ever increasing number of confirmed cases of the virus, global stocks came roaring back in the early part of February, seemingly shrugging off concerns that the virus won’t derail the global economy.
For our all cap and fundamentally-driven strategies, this type of environment has been more challenging to generate alpha with sentiment rapidly switching from risk on, to off, with stocks’ fundamentals being completely shunned. The volatility that greeted investors translated to small and mid-cap names (which typically have a greater dependency on domestic movements) taking a hammering. Amid such indiscriminate selling, stock selection became incredibly difficult as mega-cap names in the index benefitted from these moves (much of their business is reliant on developed economies). This non-selective environment tends to be followed by good rebound of our strategies as at the end of the day fundamentals prevail in the market!

Europe in Focus

European markets also caught some of the contagion from the Coronavirus, with certain industries heavily impacted such as; Airlines, Mining and Luxury Goods. Adding to the uncertainty surrounding key political events, European investors are right to be mindful of the direction of markets. Brexit finally happened, but negotiations promise a long a turbulent road before an agreement can be found. The ECB continues to promise strong support to the economy, but some market pundits are in the opinion that the ECB has probably reached the limit of its monetary policy, at least in terms further reducing interest rates. Following an extremely challenging year for equity market neutral strategies, hedge fund view Europe with great interest; increasing their exposure across their short book, seemingly attracted by those uncertainties and a recent uptick in volatility. 2020 perhaps has already witnessed the first positive signs for a return of investor flows into active managers, an element which could have positive consequences for our beta-neutral strategy. To date, our short book has performed extremely well across all engines (Momentum leading the way thanks to our short energy positions), providing a significant positive contribution to our RAM Long/Short European Equities Strategy.

Source: RAM Active Investment as of 31.01.2020 (performance are gross of fee)

Finally, it is worth reminding that our Long/Short European Equities strategy positive behaviour in a volatile month for European equities is reinforcing the added value of such a strategy within a broader portfolio context, acting as a true diversifier.

RAM Global Bond Total Return Fund

Our Global Bond Total Return strategy continued to perform well amidst a limited correction in credit market and a marked flight-to-safety attitude from investors favouring developed market government bonds. We believe that the current environment requires to be tactical and diversified as credit spreads remain on the tight side. As a reminder, over the past weeks we have been reducing our credit exposure. The portfolio is currently tilted towards sovereign and quasi-sovereign names. January permitted us to selectively add new opportunities as the risk/reward became more appealing.

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