Product manager Garth Taljard is bold about his safe play in generating income for investors. Despite extreme volatility in the region, Schroder can out beat their peers and came out on top in performance and risk control. Its Head of Multi-Asset Product in Asia speaks to BENCHMARK about his success and what to look forward to in Asia.
BENCHMARK: What are you trying to achieve for your investors and why is your multi-asset approach different from your peers?
Garth Taljard: Our ultimate objective is to provide regular income and capital growth for our investors over the medium to longer term, and because we adopt an unconstrained approach we can take advantage of the Asian yield opportunities. One of our principles has been an active allocation between directly held Asian equity securities and bond investments based on our top-down outlook and a bottom-up approach to identifying companies offering attractive yields with strong balance sheets and healthy cash flow generation.
BM: Which asset classes have been your key contributors and can you give us an example?
GT: So in January 2016, the Fund’s equity portfolio strongly outperformed the broader market which fell by 8% while the equity portfolio was down only by 2%, mainly due to our lower China exposure and more defensive security selection. In risk management, currency hedges have added value especially the hedges on the Australian dollar which depreciated by 2.8%. The equity hedges through selling Hang Seng and China H-Share index futures also helped.
BM: How does the team structure work to undertake allocation among different investment buckets, and what is the preference of the team now?
GT: The Schroder Asian Asset Income Fund is managed by three key investment teams: our Multi-Asset team decides on asset allocation and risk management; our Asian equity team selects high dividend yielding Asian stocks; and our Asian fixed income team invests in a diversified portfolio of Asian bonds, also with an income focus. We maintain our preference for Asian equities over Asian bonds, as the former are reaching attractive levels after the recent under performance. Additionally, we use listed index futures and options to manage our exposure to individual equity markets actively. We maintain the global allocation for diversification benefits while we are reviewing this position and may reduce the exposure as global assets are becoming less attractive relative to Asia from a valuation perspective.
BM: What are your risk control policies? What are the limitations on asset classes, issues and sectors?
GT: The Multi-Asset team is responsible for risk management at the portfolio level and for allocating dynamically between bonds, equities, and cash. Responsibilities include monitoring region, sector and security level exposures across the portfolio and managing the risks from currency, duration, credit and equity. The fund can invest 30 – 70% into Asian equities or Asian bonds respectively, 0 – 20% of other assets and 0 – 30% of cash. Our asset allocation uses the risk-premia based research which is at the heart of Schroders’ multi-asset process, and we do that with a focus on avoiding unrewarded risk.
BM: How do you look at risk and how do you mitigate them?
GT: We do not chase yield at any cost, rather, we look carefully at the sustainability of dividends and coupon payments. We also manage overall risk in the portfolio, specifically equity, credit, duration and currency risks. In this income portfolio, we allocate across equities and fixed income, taking into account both fundamental and technical views such as valuation, demand/supply conditions, and liquidity. The security selection approach involves comparing the cost of capital to the long-term return on capital, and also considers whether an issue is trading above or below its fair value.
BM: Do you hold any physical investments, and how and when derivatives are being used to hedge against risks including currency exposures?
GT: Our Asian equity securities and bond investments are directly held. We need to ensure unwanted risks are removed with market hedges. For this purpose, we base our decisions on three inputs: our multi-asset investment view, the results of our risk analysis, and the assessment of the hedging costs and benefits. We have a dedicated research team for volatility risk premium, which assesses market stress and the cost of option insurance. We use listed index futures and options, as well as currency forwards and fixed income hedges. Using these is cheaper than selling the underlying physical assets. As for currency risk management, we actively manage currency exposures in the fund based on our views as well as managing volatility. As at 31 January 2016, the overall exposure to US Dollars and Hong Kong Dollars was 87%.
Leaping into 2016
BM: You are currently above board on real estates. Are you concerned about the continuous slowing of China’s economy and its overcapacity issue in the property sector?
GT: Our exposure to the real estate sector mainly comprises of Singapore REITs in the equity portfolio and Chinese property bonds in the fixed income portfolio. For Singapore REITs, we prefer industrials over offices or retails as the supply of the former remains stable and demand continues to be robust. However, we have significantly reduced our Chinese property bond exposure over the past two years given their expensive valuations.
BM: What do you like about Indonesia and India, what are your favorite sectors in your different asset classes going into the rest of 2016?
GT: We like Indonesia sovereign bonds as we think the market has underestimated the macro policies to deliver higher public spending and stronger growth in 2016. We also like Indonesia utility bonds which could benefit from lower energy costs. For India, we hold some high-quality energy bonds and sovereign bonds. For our equity portfolio, we prefer REITs, utilities and communication names, while for fixed income, we retain the high-quality bias in the portfolio, primarily focusing on BBB quasi-sovereigns and corporates with attractive yields.
BM: With a backdrop of numerous global uncertainties, which asset class may have a better chance to outperform?
GT: A diversified portfolio and an active asset allocation remain critical in navigating this uncertain environment. While we are cautious about the risks from China, many Asian stock prices are reaching attractive levels. Hence, we retain a larger allocation to equities. Asian credit has held up well though the relative spread pickup over developed markets has largely disappeared. Solid corporate fundamentals and robust demand-supply conditions remain supportive of the asset class. Overall, potential currency wars, record low energy prices, geopolitical tensions in the Middle East and a slowdown in China increase overall risk. BM