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A strategy to tackle rise in volatility

Being long on equities, more tactical on fixed income and using derivatives is what a Spanish fund selector is doing to avoid volatility.

Alvaro Sauto


Jassmyn Goh

In the face of abrupt market volatility this year, fund selectors need to be more tactical when it comes to asset allocation, according to a leading Spanish fund selector.

Bankia’s head of fund of funds and absolute returns, Alvaro Sauto, said he was focused on trying to avoid volatility as much as possible by seeking out investments that did not have correlation risk.

However, Sauto noted that he was still positive on riskier assets such as equities.

“We are more invested in equities than fixed income where we see more risk.  While equities are more volatile than bonds, we diversify our allocation in two ways,” he said.

“We diversify equities geographically by being positive on emerging markets and Europe over the US.”

Sauto said Bankia was also implementing strategies to hedge against future ‘black swans’ – surprise events that deviate from the norm – and are active in derivatives, options and buying “products that avoid tail risk that could occur from unexpected events” such as shifts in policy by the Trump administration or the risk of another tech bubble.

Sauto said he was long European financials and energy stocks and was oriented towards periphery countries as opposed to the core markets.

“We think Spain is very undervalued in relation to corporate profits, so we are long Spanish equities against Italian shares,” he said.

“While we are long periphery against core, as soon as there is no trade war [between China and the US] then we will be positive on Germany because they have been hit in terms of performance because of the trade war issues.”

Fixed income strategy

In the fixed income space, Sauto said he was focused on tactical duration as the environment had become more difficult due to interest rate rises.

“This means that that you have to be long duration for some part of the year and short for the other side of the year,” he said.

“We’ve experienced over the last two weeks very good performance for long duration [bonds]. So, we need to be more active on the fixed income side. Our view for the whole year is that we need to be more tactical.”

Sauto said he would be more cautious in the second half of the year due to the earning and reporting season rollover which he said would be compelling thanks to a possible softening of the US cycle.

“It will be interesting to see whether the Federal Reserve goes behind the curve or doesn’t deal with the interest rate ratios properly,” he said.

Sauto said some funds he was invested in were:

  • Eleva European Selection-I EUR A
  • GAM Star-Continental European Equity – I EUR A
  • Muzinich Enhanced Yield Short-Term Fund EUR Accumulation
  • Deutsche Floating Rates Notes
  • Julius Baer Multibond – Local Emerging Bond Fund – C
  • Nordea 1 – Emerging Market Bond-BI EUR


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Source: FE Analytics