Barings Dynamic Absolute Return Fund

The Fund seeks to combine absolute value and relative value strategies to deliver stable returns across different market environments.

Our approach is designed to create a portfolio that is not dependant on market direction by:

• Diversifying across different market environments
• Combining absolute value and relative value strategies to provide non-directional return potential
• Creating a high conviction, low beta portfolio

Why Barings?

The Barings Dynamic Absolute Return Fund is managed by James Ind with the support of Matthew Whitbread and Merrick Styles. All are members of our Multi Asset Group which has been managing Dynamic Asset Allocation portfolios since 2002. They are further supported by the other members of the Long Short Portfolio Construction Group, which has an average of 19 years’ investment experience. This Group is built around a matrix of essential expertise and skillsets, including asset allocation, targeted return investment, security selection and relative value modelling. They also draw upon Barings’ full investment platform.

Manager Comments

This commentary relates to the month of October 2018 - to be read in conjunction with the factsheet. 

Global equity markets fell significantly in October. The reasons for this fall can be categorised into three parts. Firstly, later stages of equity cycles tend to suffer a disproportionate degree of turbulence. Valuations (PEs) tend to de-rate, even as strong earnings continue to come through. Secondly, interest rate concerns as the Federal Reserve has now hiked rates at a faster rate than markets expected and has caused US Treasury bond yields to push through 3.2%. This has led to some concerns that higher rates in the US could herald a recession. The best evidence for this is the rather soggy housing market data in the US. Thirdly, trade fears have been a significant worry for markets over the year. Initially these fears were focused around goods such as steel or cars. More recently the trade fear has spread into technology as reports of Chinese hardware hacking have spread.

We added to global equities mainly in the form of outright longs in Japan and the UK.  An additional long/short position was added with a long US vs. short Europe position.  With these moves to increase overall equity exposure the sector exposure to US technology was removed. With the bounce-back in gold prices we exited the long position.  This had been a position that had been consistently underperforming so the bounce-back gave a good opportunity to exit. The Italian government bond position was reduced at the longer end (10 year) with the on-going political instability around the budget negotiations.  We retain the shorter-dated bond and spent the cash that was raised on a Euro denominated Russian bond.  We also exited the long Brazil position (bond and currency) and switched into a US treasury.

While the rate of growth may have peaked, economies around the world continue to grow. Fears of recession are very much overplayed. Corporate earnings are strong and even as the stock markets sold off company results were coming in ahead of consensus expectations. As regards interest rate concerns, our view is very different to 2017 when markets were under-pricing the risk of rate hikes. This year has seen fixed income markets become far more appropriately priced. The good news is inflation has so far underwhelmed – a situation which the recent falls in housing rents in the US and the current weaker oil price can only help. With trade, so far the actions taken remain small. For instance, only a sixth of China’s exports go to the US. So while clearly tariffs are a problem, they need not be terminal. So while not dismissing any of the key fears that led to the sell-off, in reality the situation has not changed dramatically. It is more likely that the mini crash was brought about by overconfident investors being caught out.