Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and joining me today is Matthew Yeates, Manager of the 7IM Real Return Fund.
Hi, Matthew.
Matthew Yeates: Good morning.
Wall: So, the big question on most investors' lips at the moment is, are we about to have a significant market downturn.
Yeates: Well, exactly. This is the question that we are getting asked a lot as well as you could probably imagine. I think what's important to remember though, I think, is that many of those same stories that were there at the start of the year are here now. Just because the amount of time that goes on with low volatility, volatility hitting all-time lows with this overhang of politics in the background, with earnings perhaps looking stretched, I don't think that necessarily means we are anymore imminent towards the market rolling over and is entering a big sell-off.
I think market timing has always been a difficult thing for investors. I think the much harder thing, certainly versus history, is knowing what to do when that market does turn. So, for me, the biggest question is not how likely is the market to happen tomorrow, but how do I protect myself against that market correction, especially when many of the catalysts that you could point to for that, I suppose, are the unwinding of central bank policies, which have been potentially so damaging to the places we previously looked for protection in things like government bonds.
Wall: As a real return manager, are you praying for this correction? Because presumably, it's when markets go down that a portfolio like yours comes into its own.
Yeates: I think so. I think to pray for a downturn would be kind of more sadistic in and of itself. I think that becomes the test or a good test of any mandate which is aiming not to drive too much of its return from equities. I think over the long term, kind of, what we are trying to do, kind of, within our process is, say, okay, if we are going to generate low or stable returns, the sort of returns that you'd used to get from fixed income assets, 4%, 5%, whilst offering protection against inflation, the sort of protection you used to be able to get from fixed income assets, like inflation-linked bonds. The test of that process is kind of when the market turns.
But we can also see, now, we don't need the market to turn over to test whether there are the abilities to extract reliable, long-term premia that aren't necessarily linked to the equity markets.
And that shows itself, I suppose, in many of the specialist areas of the credit market with banks being regulated out of existence in things like ABS and CLOs. And in many of, I suppose, the alternative risk premia type approaches in systematic and quantitative strategies that we can see those returns come through at the moment even without necessarily that correction happening. The real test of a process is being able to deliver those stable returns irrespective of whether the market is going up or down. So, I'm not necessarily praying for it, per se.
Wall: You did touch on it there, but you say that fixed income is no longer the antidote to a falling equity market. So, what is? Where can you find, kind of, uncorrelated returns should and when that happens?
Yeates: Yeah. So, I think, as well – I'd like to caveat that in terms of it's not the death of the equity plus bond portfolio. What I think it maybe though – because there's more question marks around the extent to which bonds are going to deliver those returns going forward. It's about diversifying those diversifiers.
So, where we are looking? Well, we are trying to really segment areas of the alternative market that were traditionally, I suppose, segmented in terms of alternatives and thinking about those stable return objectives. And so, when we think about that problem, we think about things like systematic long-short equity funds, we think about specific ways of playing volatility in, say, equity markets, that can a source of long-term dependable carry.
And as I kind of already touched on already, I think, many of the areas which – pre-global financial crisis, you would have had the banks stepping in and making a return, things like mortgages, things like loans. They aren't necessarily linked to interest rates, per se. In many cases, they are floating rate exposures to credit. We think there are opportunities in all of those. And combined – not just a single one of them is going to be panacherie, but combined in a sensible way with a sensible risk process, we think, that is the antidote to diversifying your diversifiers.
Wall: Matthew, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
