Investment Worries After the Boom, Fear

Investing in the U.S. paid off last year for managers of mixed funds. But rising inflation could spoil their party in 2017.
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If only dollars could talk.

The winner lives in San Diego. Doug Forsyth can look forward to positively summer-like temperatures of 20 degrees Celsius in the coming days. But the fund manager at Allianz Global Investors won’t have much time for sunbathing.

Instead, he can bask in the knowledge that he’s come in on top of the 2016 rating for the biggest mixed investment funds, generating a gain of 12.6 percent for euro investors.

From a European point of view, however, Mr. Forsyth’s lead is a tad exaggerated. Mr. Forsyth invests virtually all the money in his home country. “Around a third each in shares, high-interest bonds and convertible bonds,” he said. That’s unusual for a typical mixed fund in two respects: all three investment forms bear a relatively high risk, and all investments are denominated in dollars.

But the risk paid off last year. Shares did well and so did high-interest bonds. Also, the dollar’s appreciation gave earnings an additional boost when translated into euros. “That’s a very specialized product, betting on a single country. And it’s bad when everything goes against risk investments,” said Barbara Claus, an analyst at fund rating agency Morningstar.

That’s a very specialized product, betting on a single country. Barbara Claus, Analyst at fund rating agency Morningstar

After all, classic mixed funds are meant to spread their assets among bonds, shares and cash – each in different regions and currencies. That was a real challenge last year.

“At the start of the year, many managers were wrong-footed by plunging shares and the recovery of raw materials prices,” said Ms. Claus. Then, in the second half, bond prices fell, which hit a number of funds. On top of that, political curveballs were flung in the form of Britain’s Brexit vote and the election of Donald Trump.

“The majority of managers seemed to have suffered rather than profited from the heavy market volatility,” said Ms. Claus. A prime example is the popular “Ethna-Aktiv” fund run by Ethenea Independent Investors. Its well-known manager Luca Pesarini sustained losses last year, which was unusual for a mixed fund.

“Looking back we had too many shares at the start of last year and were subsequently often too defensive with shares and bonds,” said Christian Schmitt, a fund manager at Ethenea. Investors withdrew several billion euros.

The bestseller of previous years, the “Patrimoine” fund run by French firm Carmignac, fared better with a gain of just under 4 percent and helping to offset previous errors.

The interest rate turnaround in the U.S. is foreseeable now, and fund managers must react to that in their asset structure. Christoph Bergweiler, Head of Asset Management for JP Morgan in Germany

“It went for very heavy bets, but the stronger weighting of shares from emerging markets and the raw materials sector, as well as emerging markets bonds helped last year,” said Ms. Claus. Despite some fund withdrawals, the fund remains the biggest in its class with more than €24 billion, or $25.7 billion, under management.

From a German point of view, Bert Flossbach remains in strong demand with his “Multiple Opportunities” fund. The fund manager and management board member of investment company Flossbach von Storch had a good year with a gain of 5 percent. After shares slumped last year, he bought back into the market at low prices, and it paid off.

“He has a clear view of the world, is credible, consciously accepts risks and clearly tells his investors that,” said the head of another fund company who described himself as a “fan.”

So what about 2017? It has at least as many potential pitfalls as last year, with a plethora of questions on the economy, inflation, interest rates and the consequences of Donald Trump’s policies.

Managers at Carmignac have a clear idea of how the year will pan out. “We have prepared ourselves for Trumponomics and higher inflation,” said Didier Saint-Georges, investment strategist at the French firm. It has around half its clients’ assets invested in shares that will likely profit from Mr. Trump’s promised economic stimulus and rising inflation: raw materials, finance, gold, infrastructure and U.S. airlines.

Mr. Flossbach is even more heavily invested in shares. But the sector is divided on the wisdom of relying on equities.

The strategists at the Ethna fund have less than a quarter of their assets invested in shares, arguing that a low-risk approach and a focus on preserving capital is more important than chasing profit. They have put a large part of their funds into dollar-denominated corporate bonds. Mr. Schmitt of Ethenea said corporate bonds were yielding in excess of 4 percent.

But Mr. Schmitt is in the minority. The consensus among fund managers is different as far as interest rates are concerned.

“For more than three decades bond prices have basically only been rising, meaning that yields have been falling,” said Christoph Bergweiler, head of Asset Management for JP Morgan in Germany. “The interest rate turnaround in the U.S. is foreseeable now, and fund managers must react to that in their asset structure. However, many concepts only allow that to a limited extent.”

The Carmignac fund is betting on this scenario. “Because we expect higher inflation we’re very cautious with bonds,” said Mr. Saint-Georges. He said U.S. inflation could already hit 3 percent in the first quarter and that many market participants weren’t prepared for that. They were wrong to dismiss inflation as a temporary phenomenon, he said, adding that Mr. Trump’s planned stimulus measures posed a significant interest rate risk.

If the Carmignac fund manager is right, then Mr. Forsyth, last year’s winner, will have to change tack. “We can protect ourselves from rising interest rates,” he said.

But Ms. Claus, the Morningstar analyst, is not so sure. She pointed out that in 2008, at the height of the financial crisis, the fund lost a third of its value. For a mixed fund, she said “that’s an enormous amount.”


Ingo Narat is an editor with the finance section of Handelsblatt and based in Frankfurt. To contact the author: na[email protected]