Incisive Works Presents: Three Minutes With Mike Riddell, Allianz Strategic Bond Fund

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How do you lever those resources into your investment process?

There are three stages. The first bit is our macro outlook – looking at what’s priced in versus what we believe, or a disconnect between the data and the valuations. The second is generating ideas, whether they’re ideas that come from the macro analysis, standalone ideas, or hedges. And the last bit is the implementation where we put it all together, stress test, and so on. Implementing our ideas requires great flexibility. Let’s say we think the world is going to blow up! Do we want to take advantage of that view in credit, rates, FX or a combination? In the US or Mexico? That’s where we actually spend a lot of our time: talking, testing, putting forward different ideas, running scenarios or stress tests of how they will perform. We can be quick to act – we’re not going to wait until next week and have a committee meeting. Flexibility is critical because different markets – by geography, or emerging vs developed, or government bonds vs credit, or across the different investment tools – price in different things. Maybe currencies price in one outcome, while inflation markets price in a completely different one. That’s why we like a full global opportunity set and toolbox. Of course, you’ve got to get the view right!

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You’re a small team with a lot of global flexibility – how do you cover the ground?

We are in an almost perfect position because we have a small boutique-like team in London – four of us sit here – with access to, and input from, an emerging markets team in Asia, US and London; a global fixed income team; credit teams all around the world; and economic strategists all around the world.

What does your third goal – asymmetry – actually mean?

Put simply, when we’re right we want to make more money than the amount of money we lose when we’re wrong. We think of it in two ways. One way is finding ideas that seem asymmetric, sometimes for fundamental reasons. For example, in the UK, when we already had an interest rate cut priced into the UK fixed income markets, and the Bank of England doesn’t do negative rates and had specifically said they wouldn’t under Mark Carney. So the fundamentals seemed somewhat asymmetric, in the sense that yields could go up a lot more than they could go down. The other way is asymmetric structures. For example, if you buy protection using a credit default swap, you pay a premium and your downside is limited to that, but your upside is potentially unlimited or very high. Again with an option, there’s unlimited upside, and downside limited to the premium. That’s a very important part of the fund. This shows in our returns. We’ve had some quite big ‘up’ months/quarters, whereas the ‘down’ ones have been contained. That’s deliberate and it’s executed through those asymmetric trades, including hedges. For example, a stress test might reveal you are exposed to a fall in the oil price, and you can hedge that risk out. You don’t want to hedge away all risks but you do want to hedge certain factors.

What else sets you apart?

Aside from correlations, two other goals differentiate us: flexibility and asymmetry. We have a lot of flexibility away from our benchmark, the Bloomberg Barclays Global Aggregate (FX hedged), whether that’s being able to have half of the fund in high yield, if we think high yield is very attractive; use currencies that aren’t in our benchmark; take positions in inflation markets, both long and short, around the world, that are not in our benchmark; and take yield curve and duration views, again meaningfully away from our benchmark. For example, benchmark duration is 7.2 years. In theory we can be between zero and 12 years, and in reality we’ve been between 3.5 and 11 in the last 18 months. So we don’t only have flexibility – we use it. The result is that we think we can generate alpha per year of around 200 basis points, though that is a goal and certainly not written in stone.

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We don’t only have flexibility – we use it.

Can you give an example of the risk-on/risk-off shift?

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This Spring we moved to more ‘risk on’, from being near 100% in very high quality government bonds going into the crisis (plus overlays), to having half the fund in longer-dated investment grade corporate bonds, as risky asset valuations went to their cheapest in almost a decade. That’s not to say the portfolio is now very highly correlated to equities – we never want all active positions pointing in the same direction and have a number of uncorrelated strategies and portfolio hedges in case the global economy fails to improve. Nor would we expect to remain ‘risk on’ for a prolonged period.

We wanted to create something uncorrelated to equities – a diversifier, a true bond fund.

How do the goals of the Allianz Strategic Bond Fund differ from other bond funds?

The goal that really differentiates us is correlations. We launched this fund in 2016, knowing that many strategic bond funds are heavily invested in investment grade and high yield corporate bonds, and therefore behave like equities to a large extent. We wanted to create something uncorrelated to equities – a diversifier, a true bond fund. We are seeking a zero correlation between our fund and global equities, call it MSCI World, over a rolling 3-year period (not over every day or every week), but up to a target maximum of plus 0.4 over a 3-year period. Since we launched the fund, we are pretty much exactly zero. That’s over a 3-year period, but it’s only fair to stress that you can’t really control correlations, and there will also be times that we might want to be risk-on or risk-off.

You can watch Mike here or read his views below

The year 2020 is proving to be one of the most unusual and volatile in financial market history. The coronavirus remains a threat and the recovery period may prove turbulent with further events prompted by pandemic costs and geopolitical friction. Mike Riddell, co-manager of the Allianz Strategic Bond Fund, tells us about his key goals for the fund and what makes it different from its peers.

INTRODUCTION | ASSET CLASS | RISK PROFILE | INVESTMENT PROCESS

INVESTMENT PROCESS

RISK PROFILE

ASSET CLASS

INTRODUCTION

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