Just like many of their counterparts in the rest of Europe, fund selectors in Spain are grappling with their fixed income exposure. They are desperately seeking to diversify their holdings in preparation for rising yields. So far, they have mostly done that by stepping up their exposure to long-only multi-asset funds which invest in a wide range of equities and bonds.
All money on multi-asset
Data provided by Inverco, the Spanish Association of Investment and Pension Funds, suggest Spanish investors channelled more than half of their net inflows in 2014 into multi-asset funds (see chart below). This unprecedented move into multi-asset funds was prompted by the slashing of interest rates on bank deposits in Spain in 2013 and 2014, explains Javier Hoyos (pictured), an investment manager for Crédit Agricole Mercagestion SGIIC in the Basque region of Spain. Spanish investors, who traditionally prefer cash or bond investments, channelled some €8.5bn in assets from bank deposits and from guaranteed-target bond funds into multi-asset funds last year.
“These massive flows are potentially dangerous,” says Hoyos. “We are mostly talking about very conservative investors, who are often without any investment experience and may not be aware that they are now exposed to significantly more risk.”
The alternative solution
Alternative Ucits funds, and multistrategy funds in particular, are a safer option for these investors, says Hoyos. “By investing in a fund-of-fund composed of several multi-strategy funds, you minimise risk and you have a low correlation with other asset classes.” Even though these funds do typically not return an awful lot to investors (CA Selección, one of his funds, promises his clients Libor + 100bps, and annual volatility of 2%), the Basque fund selector suggests conservative clients assign a significant portion of their assets to these funds. “I would typically recommend an allocation of 60%.”
Almost half of delegates attending EIE’s previous event in Barcelona last autumn said they would 
increase exposure to alternative Ucits equity strategies, while the majority of Spanish fund selectors plan to increase their exposure to absolute return overall. This at least suggests Hoyos is not alone in his suggestion investors should turn to alternative strategies to shield themselves from market upheaval.
increase exposure to alternative Ucits equity strategies, while the majority of Spanish fund selectors plan to increase their exposure to absolute return overall. This at least suggests Hoyos is not alone in his suggestion investors should turn to alternative strategies to shield themselves from market upheaval.Unloved bonds
Buyers of developed market bonds are hard to find in Europe, but in Spain they are an endangered species: only 5% are looking to increase allocation to government bonds, while more than eight in 10 say they will cut exposure. The sentiment picture for corporate bonds is a bit less bearish, with ‘only’ slightly over half of fund buyers planning to cut down their exposure. Only emerging market debt has a sizeable proportion of buyers.
However, and possibly contrary to expectation with bond sentiment being so bearish, there is a large discrepancy between short-duration and long-duration bonds, the latter being far more popular than the former. In the first 11 months of 2014, Spanish investors poured €8.5bn into long-duration bonds, and only €1.5bn into bonds with a shorter maturity. November even saw net outflows of €374m from the asset class.
