"Interest rates are likely to rise only slowly"
Marc Both, portfolio manager for UBS Strategy Funds, explains how he keeps his finger on the pulse of the markets and why the investment strategy funds are equipped to deal with potential interest rate scenarios.
March 19, 2014, Interview: Stephan Lehmann-Maldonado
What does a typical day in the life of a fund manager look like?
Marc Both: Because the financial markets are dynamic, new challenges present themselves every day. We maintain a constant dialog with our specialists and counterparties so that we can react to changes in the market. Basically, we fund managers have four main tasks: First, we have to rapidly implement the tactical investment decisions taken by the Investment Committee of the UBS Chief Investment Office (CIO). Second, we actively select equities and bonds; this is known as "stock picking." Third, we handle the inflows and outflows of funds on the part of clients and invest these in accordance with our investment strategy. Fourth, we monitor the various risks of the funds on a daily basis.
The commodity markets seem to be favorably valued at present. Why don't you invest in them?
Marc Both: Before investing in a new asset class like commodities, we check whether the associated risks are sufficiently compensated for by attractive return opportunities. As far as commodities are concerned, that is not currently the case. Because currencies are just as volatile as equities, only they don't pay out dividends. What's more, their value is strongly dependent on macropolitical factors. However, once the global economy has sufficiently recovered, the Investment Committee can review the situation. Should it then decide to build up a tactical exposure to commodities, it would be permissible to do so through the Strategy Xtra Funds. Although we do not invest directly in commodities, investors can participate in these markets indirectly through shares of energy companies and commodities firms which are included in the Strategy Funds.
What "extras" make the UBS Strategy Xtra Funds stand out from the UBS Strategy Funds?
Marc Both: The UBS Strategy Xtra Funds also invest in alternative investments such as hedge funds. This enables private investors to benefit from the performance of these investments, to which it would otherwise be difficult or impossible for them to gain access. And we guarantee the daily liquidity. Alternative investments increase the chance of returns as they create more investment opportunities than traditional investments such as equities and bonds. In addition, they help improve portfolio diversification. In the last year, for example, UBS Strategy Xtra Funds generated a slightly higher return than the UBS Strategy Funds. Strategy Xtra Funds are likewise probably the better option for anyone who is expecting to see interest rates rise, as the fixed-income component is smaller. Which funds investors decide on ultimately depends on their individual needs.
Conservative investment strategies - such as "Yield" or "Income" - come under pressure when interest rates rise. Do you agree with scenarios claiming that up to 3 percent in value could be lost if interest rates go up by 1 percent?
Marc Both: Theoretically such a scenario would be possible. In our opinion, interest will not rise abruptly this year, but climb slowly. Last year, government bonds had negative yields and returns are likely to be very low again this year. Nevertheless, it makes sense to hold onto bonds. They offer regular income and ensure a certain diversification should share prices collapse. An additional factor is that we can partly hedge against the risk of rising interest rates. That's why our investment strategy - that of strategic asset allocation - includes a larger component of high-income bonds, such as emerging market bonds, US high-yield corporate bonds and global investment grade corporate bonds where capital is tied-up for shorter periods. This should balance out the negative effect of rising interest. And should there be a sudden spike in interest rates - contrary to expectations - we could, for example, tactically adjust our portfolio with derivatives within a very short timeframe, if the Investment Committee so decides.
How quickly do you implement investment decisions?
Marc Both: When the markets are in crisis, lightning-fast reaction is required. Our advantage here is that we have people in all the main financial centers around the globe. This means we get first-hand information very fast and are able to take action 24/7.
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