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What aspects of your investment approach played the biggest role in outperformance versus peers?
There are really two things that add to our performance and make us different from our competitors. One is agility, demonstrated by our ability to move quickly when we get new information that suggests our strategy is misaligned. The second is that we maintain a resolute focus on research, recognising that, as the world changes, we need to change our model sets and strategies to reflect it.
The sorts of strategies we've deployed were very successful over the last couple of years, making 40% or so, returns on capital deployed
We were able to capitalise on opportunities just about everywhere
Tell us about the PGIM Wadhwani Keynes Systematic Absolute Return Fund
We run systematic absolute return, mainly macro strategies. The fund targets a return of cash plus 5% with volatility of 7%, so that results in an information ratio close to unity. We are also aiming to offer returns that are additive for conventional long-only investors. In other words, returns that are orthogonal to the returns that they get from holding equities.
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In an environment marked by macroeconomic volatility stemming from central bank efforts to tame inflation, the PGIM Wadhwani Keynes Systematic Absolute Return Fund generated positive performance in 2022 amid major market declines.
PGIM Wadhwani’s Michael Dicks, Chief Economist and Deputy Head of Research, shares insights on the opportunities his team identified, including the rate-policy uncertainty at the heart of last year’s investor concerns, and the strategies used to capitalise on them. He also explains how macro volatility can foster a fruitful environment for systematic macro strategies.
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Michael Dicks on the key contributors that underpinned PGIM Wadhwani Keynes Systematic Absolute Return Fund’s double-digit return in 2022
What were the standout contributors to your outperformance in 2022?
However, emerging markets remain susceptible to technical factors. This year has produced the worst EM fund outflows on record, and the asset class remains vulnerable as the U.S. Federal Reserve and other central banks raise interest rates in an attempt to fight inflation.
Nevertheless, EM does tend to perform well once the path for Fed rate hiking becomes clearer. It may take some time for that to happen in this cycle, but we think EM is in a good position to outperform once that occurs.
For these reasons, at PIMCO we are constructive on emerging markets, but cautiously so for the near term.
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For Professional Investors only. All investments involve risk, including the possible loss of capital.
Past performance does not predict future returns.
Diversification does not assure a profit or protect against loss in declining markets.
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Is the current environment especially good or bad for your type of strategy, and how might economic outcomes ranging from a soft landing to recession affect your answer?
We put a lot of effort into researching central banks and how the Federal Reserve has changed in the way it now sets policy. The Fed has switched from being proactive and trying to forecast inflation risks to reactive and waiting to see what happens before it actually moves rates.
We think the adjustments we've made there have been successful in dealing with big changes in the yield curve slope from where it was initially when the Fed wasn't moving and still talking about transitory inflation. We saw the long end selling off and the yield curve slope steepening, but then the Fed got very active and moved rates up aggressively. Eventually the yield curve didn't just flatten but inverted.
The sorts of strategies we've deployed were very successful over the last couple of years, making 40%, or so, returns on capital deployed. This should be really helpful to us in this environment where the Fed is still centre stage.
What were the standout contributors to your outperformance in 2022?
The encouraging thing for us about 2022 was that almost everything worked. It was the breadth of performance rather than one or two bets that turned out well. We can illustrate that by looking across the 70 assets in three different asset classes that we trade and the different investment styles that we use.
Both directional positioning, where we take a long or short position in a particular asset, and relative value, where we ensure no underlying beta with that asset class by going long one asset and short another, paid off. We were able to capitalise on opportunities just about everywhere.
If the Fed pushes us into a recession, which I think is a real possibility, we know from the last 20 years that we've been running systematic strategies that opportunities to capitalize on those conditions will emerge. Our best year was actually in 2008, in the midst of a recession.
We've also seen from the last few years that we can cope if we end up in a different scenario, either a soft landing or maybe a situation where inflation again surprises on the high side as it did last year. We think it's a great environment however these matters play out. Lots of macro volatility is likely whichever way it goes. Exactly the sort of things that systematic macro strategies are designed to take advantage of.
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INTRODUCTION
Three Minutes With
What aspects of your investment approach played the biggest role in outperformance versus peers?
The encouraging thing for us about 2022 was that almost everything worked. It was the breadth of performance rather than one or two bets that turned out well. We can illustrate that by looking across the 70 assets in three different asset classes that we trade and the different investment styles that we use.
Both directional positioning, where we take a long or short position in a particular asset, and relative value, where we ensure no underlying beta with that asset class by going long one asset and short another, paid off. We were able to capitalise on opportunities just about everywhere.
We put a lot of effort into researching central banks and how the Federal Reserve has changed in the way it now sets policy. The Fed has switched from being proactive and trying to forecast inflation risks to reactive and waiting to see what happens before it actually moves rates.
We think the adjustments we've made there have been successful in dealing with big changes in the yield curve slope from where it was initially when the Fed wasn't moving and still talking about transitory inflation. We saw the long end selling off and the yield curve slope steepening, but then the Fed got very active and moved rates up aggressively. Eventually the yield curve didn't just flatten but inverted.
The sorts of strategies we've deployed were very successful over the last couple of years, making 40%, or so, returns on capital deployed. This should be really helpful to us in this environment where the Fed is still centre stage.