It’s not just the prospect of deteriorating fundamentals that has Man Group Plc’s Mark Jones skeptical about stocks these days. It’s also the risk of money flowing into fixed-income investments now that they sport attractive yields.
Jones, the deputy chief executive officer of the world’s largest publicly traded hedge-fund manager, joined the What Goes Up podcast to give his outlook on markets and explain what strategies have been working well at his firm.
“The risk-reward in equities is very, very tough at the moment,” he said on the podcast.
Here are some highlights of the conversation, which have been condensed and edited for clarity.
Q: You say equity markets are pricing in a soft landing — but you’re not convinced that they’re right. Could the rally be a head-fake?
A: The risk-reward in equities is very, very tough at the moment because they’re effectively implying that the Fed does manage to navigate this and land things perfectly. They’ve got an incredibly difficult job on their hands. I definitely wouldn’t want to be in their shoes right now because you’ve got very material risks on both sides, and indeed you’ve now got financial stability coming up as a third risk that frankly I wasn’t thinking about six months previously.
But the standard ones, which clearly have been the ones on their mind for most of this period are: OK, we do think we’re going to cause a drop in economic growth, but can we time that perfectly? Can we have a mild recession without major job losses? They understand what they’re doing, they understand the potential consequences — can they get the dial right? Economies are not things where the dials work desperately well.
And then the risk on the other side: If there’s sustained inflation, they have to get it back to 2%. That is their mandate. They will have to be higher for longer if it doesn’t move down. And the path between those two things is pretty hard. And then to throw the third problem in: OK, do we put enough stress in the financial system here that they suddenly have to start worrying about financial stability as the other piece of their mandate, that has been in the background for most of the last 18 months or so — which suddenly came very, very aggressively into view with SVB.
Q: So you’re expecting more volatility?
A: Equities are difficult because we haven’t really seen the cut in earnings. Obviously some drift down in earnings expectations, but nothing too material. So that’s definitely one leg, which is just the fundamental piece. And then the other is just a flow piece. You know, we are starting to see people move back — obviously into money markets, out of banks — but also into credit and government-bond positions in a way that they just haven’t had for years because there hasn’t been enough return there to attract people.
Q: Can you break down for us what worked in the world of hedge funds last year?
A: Trend-following was definitely a big driver. Systematic funds did very well last year in macro markets. There were some big trends to invest in. So some of the commodities moves at the start, obviously the bond moves throughout, the dollar move was a big positive contributor. So there were plenty of places for positive returns to be had. And CTAs are very good at capturing those sorts of macro moves.
And when you step back, we’ve had this very prolonged period where all developed markets have basically been doing the same things with interest-rate policy. There’s been this very, very high correlation and then that’s clearly pushed into a bunch of other asset classes. It’s generally dampened volatility down, it’s increased correlation. It’s been quite a tough environment for alpha — or at least there’s less opportunities than what you would normally have seen pre that period of very, very low interest rates.
What we’re moving back into now is something that’s much more akin to ‘08. Equity vol hasn’t increased in the same way, but in a lot of other asset classes, you’ve seen quite material step-ups. There’s a lot more going on. There’s a lot more differentiation in how countries are managing their interest rates because of some of the core macroeconomic differences between them — where inflation is, where energy policy is in each of those places, strength in the job market. That’s exactly the sort of environment that suits some of these macro strategies over time because there’s just a lot more opportunity. The risk-management skills are a lot more relevant when things are moving around in that sort of a way. So trends were absolutely critical to a lot of the strong outlier returns last year. But we think that environment’s going to persist. And frankly it feels like the future decade’s going to be a lot more like that rather than just the next year or so.
Q: So 2023 will another good year for trend following you think?
A: The last month or so has been tougher for trend followers, specifically because of the interest-rate moves post-SVB. But that’s in the nature of the strategy. You’ll have some difficult periods — they work over time. But it’s higher volatility and lower correlation between things. So at some level, just much more macro uncertainty. That’s the environment when you want strategies which can help you navigate that uncertainty. And that at heart is what trend followers are very good at doing over time.
Q: Has everything changed now for, say, private versus public — the appeal of each type of investment?
A: We’ve obviously had this huge trend in asset management — it’s more than a decade old now, arguably two — of increased allocation into private markets over time from the big asset owners. And the period of low interest rates definitely helped that trend because you just had to go somewhere new for returns rather than the traditional asset classes. I don’t think we’re going to see some huge pivot away from that because there’s a lot of money allocated and you can’t pull it out quickly. It takes time. Plus, frankly, they are useful sources of return in people’s portfolios. But the speed of that trend is definitely, at a minimum, going to slow down. And a lot of people, they’re going to tilt back toward public markets for the first time in really quite a long time because it’s been relatively inexorable of adding to their private allocations year by year.
And that’s for a couple of reasons. One, there’s more return from some traditional asset classes, in particular on the fixed-income side. So people go, ‘Actually, I don’t need to reach out on the risk spectrum, I can meet my investment goals with some much more traditional returns.’ They’re much happier if they can do that in a lower-risk way. And the other thing is we saw the benefit of liquidity. The UK had a relatively spectacular blowup in the gilt market last year. You had clients who suddenly had a very, very strong liquidity need to meet that big, big market move, and they were having to sell assets to meet cash calls.
And suddenly that reminder of things that I can liquidate if I need it in a crisis and the value of that so I’m not a forced seller of something else. We’d sort of forgotten that as a key benefit of liquidity. But we’ve had a few reminders in some of the panic periods, of that benefit of more liquid assets. So both for a risk-management piece, a balance piece, and a return piece, you’re going to see tilts back. Private markets are well established as parts of investors’ portfolio, so it’s not that they’re just going to drop them. But I think the speed of growth is going to change.
--With assistance from Stacey Wong and Andrew Harrer.
This article was provided by Bloomberg News.