A dissonant quartet

Although we only had the opportunity to interview Romig on this occasion, he is keen to give credit to the other three multi-asset portfolio managers, who may have different investment views and positions. Just as Beethoven helped to make once scandalous dissonance a valued part of music, team consensus is anathema to Romig. “We get scared if we all have the same view. This means we have no edge and must reassess. Normally one of the four portfolio managers pitches for a small allocation, which can be increased step by step, or may proceed two steps forward and one step back,” he reveals. A further check and balance comes from oversight by Assenagon’s risk management unit.

Assenagon has four verticals – equity, credit, volatility and multi-asset – but multi-asset fund allocations are almost entirely external. Managers include some of the largest traditional and hedge fund managers in the UK, US and a few elsewhere, such as one in Norway to run the Nordic high yield fund. ETFs costing a few basis points a year can also be used to express beta views mainly for equities, though ETFs are not necessarily cheaper than other funds for strategies such as asset backed securities and various absolute return strategies where some actively managed fund fees can be tens of basis points, and ETFs may even cost more.

The multi-asset team has considerable flexibility in the choice of instruments and allocation decisions. Though they rarely invest in single stocks or bonds, they can select derivatives, ETFs, mutual funds and liquid alternatives hedge funds covering a huge variety of geographies, asset classes, traditional beta, exotic beta and alpha oriented strategies. Liquidity is non-negotiable however and 97% of the book can be liquidated within 2-3 days.

Asset allocation

Historical asset allocation ranges have included 8-50% equities, 0-3 years interest rate duration, 0-10% commodities, and 0-25% non-Euro currency exposure but these are not hard boundaries set in stone. The strategy could in theory take on larger beta exposure, though this would probably be structured asymmetrically. “The highest historical equity exposure of above 50% included some delta-adjusted option exposures, where downside risk could have been limited to option premiums paid,” says Romig. The average beta to equities and credit has been below 0.20. The strategy could in theory go short of bonds or equities, though is unlikely to do so.

Overall, Romig calculates that asset allocation has generated about 60% of outperformance, while bottom-up selection of themes has contributed 40%, though this does vary by asset class: “Asset allocation has been more important for equities and theme selection more important for credit, selecting within the asset classes of government bonds, money market and corporate credit”.

Ways to play defence – cash

Cash levels reached as high as 50-60% in parts of 2020 and 2022, but not for the whole of either year. In early 2020, the strategy was swift to reduce credit and equity risk when the gravity of Covid risks became apparent – and rapidly re-entered these markets in March 2020.

Cash holdings were a calculated tactical manoeuvre: “We were prepared to pay a small negative interest rate for holding cash, of minus 0.5% or 0.6%, because we then had the optionality and dry powder to buy equities and credit on cheaper valuations,” recalls Romig. Cash was held with highly rated German Landesbanks, a sort of state-run bank.

Cash can be a tactical or temporary move but if Romig is feeling more cautious over longer periods he may seek quasi-bond substitutes.

Bonds

The bond allocation peaked in 2020 (at a duration of about 3 years) when Romig accurately judged that US Government bonds paying 1.7% or 1.8% still left some scope for cutting rates: “This was a typical move. In stressed markets, we would normally have more exposure to government bonds”. But in 2022 Assenagon recognized that bonds would not be a safe haven, exited fixed income almost entirely and reduced interest rate duration to near zero; Romig admits he would have liked to have gone slightly negative duration.

In May 2024 interest rates were much higher, but Romig still does not find government bonds attractive and has a minimal weighting. “To increase bond exposure we would need to fear a really hard recession in Europe, which looks unlikely with strong fiscal support and low unemployment,” he explains. The inverted yield curve is also a factor with short term Euro interest rates higher than even a two-year bond in Europe.

In 2015-2016, Assenagon raised absolute return allocations to a peak of 45% as a bond alternative, but they have recently dropped to between 10 and 20%. In 2024, absolute return allocations include merger arbitrage and long/short equity.

Niche equity themes

Bottom-up themes can lead the strategy to drill down into specialized and niche areas such as asset backed securities, Japanese small caps, catastrophe bonds or infrastructure investments.

In May 2024, equity exposure was slightly “underweight” the US and a little “overweight” value markets such as the UK and Japan. The US is still the largest equity country allocation, but the portfolio was cheaper than global equities on a price to earnings, book value or cashflows multiple. Other themes pinpointed are energy stocks, anti-cyclical value and reflation in Japan.

Assenagon has been impressed by Japan’s improved transparency and corporate governance, such as companies reporting in English, penalties for persistent discounts to book value and measures addressing the sorts of cross-holding structures that Romig recalls were common in Germany 30-40 years ago.

Corporate credit

In credit the exposure in mid-2024 is mainly high yield corporate debt. “Although spreads have compressed, we still find that a credit spread of 290 basis points on high yield is much more attractive than 60 on investment grade. The risk premium also varies since the credit ratings of the high yield universe have risen considerably over the past year,” says Romig. The average credit rating on the portfolio is BB+, on the cusp of investment grade, and the yield averages over 7%, but in the event-driven bonds sub-strategy yield to maturity is much higher at nearly 12%. The best performing credit theme in the first half of 2024 has been selected CCC-rated corporates in emerging markets. “They are better quality than developed companies with the same credit rating,” says Romig.

As well as continental European high yield, Assenagon has looked north and selected Nordic high yield for some additional yield pickup – and less interest rate exposure since three quarters of the market is floating rate. The extra yield partly arises because issue sizes in the Nordics are too small for some of the largest asset managers to consider.

ILS

Insurance-linked bonds, which pay a floating rate-related premia, entered the portfolio in 2020 and made a small positive return over the next two years while European government debt saw a 25% drawdown. Since early 2023, insurance-linked has continued to outperform, making double digit returns, as its yield has risen with both higher interest rates and higher spreads. The spread remains in high single digits while Assenagon model a probabilistic expected loss of only around 2%. This appears to be a high-risk premium.

Volatility and drawdowns

Volatility for the cautious product is normally within a 3-6% range, though it is sensitive to the longer-term interest rate regime and can sometimes overshoot as in 2022. (Assenagon Multi Asset Balanced targets a higher return of 5-9% per year and can take more equity and currency risk.)

Since inception in 2016, the cautious strategy has had one double-digit drawdown of 11% or roughly two average standard deviations, due to Ukraine and interest rate related volatility in 2022. There have also been a few high single digit drawdowns around late 2016, late 2018, and Covid in 2020. All of these are within the range of expectations.

There are some hedges. VIX call options have been owned, for instance around Brexit in 2016. The product has exposure to two long volatility strategies, including one run in-house, which is the only internal allocation apart from money market funds.

Macro calls

Though Assenagon have made some bold macro asset allocation calls, Romig rather humbly does not expect to be better than other economists and is cautious about looking in the rear-view mirror. “We are always flexible, and indicators are a mirror that can be wrong, especially when we see new scenarios. The four of us have more confidence in picking discretionary bottom-up themes,” says Romig.

Occasionally however they have made some bolder macro wagers. “In March 2020 we saw an oscillator signal almost the same as March 2009 indicating a trough. Around Covid we got back into risk assets a bit early, before the Fed announced unlimited QE and schools shut down after the trough of the equity market. One of our macro indicators only throws up a signal on average once every 2 to 2.5 years, which has high predictive power over the next four months. It has recently signaled an upturn of economic growth, which had turned negative. Since we saw this signal in October/November 2023, markets have risen about 25% which is historically typical,” says Romig. Romig highlighted a specific indicator, but Assenagon monitors a wide range of sentiment, positioning, fund manager surveys, technical, option skew and financial stability indicators.

In 2024, gold is held (through a UCITS) as a general portfolio diversifier and because Assenagon expects the USD to weaken on continued de-dollarisation. The strategy can also invest in broader commodity indices. The usual currency exposure is 75% Euros. Some USD equity exposure is currently being unhedged. Moderate leverage is used through derivatives rather than the balance sheet.

Asset raising

Assenagon is an independent asset manager with no distribution ties that has won clients, and over EUR 50 billion in assets, through performance. Some share classes aim to distribute 2.5% per year but accumulation share classes are also available, which may be more tax efficient in some countries including the UK and Spain.

ESG

The strategy reports under SFDR 8. External managers, including active managers and ETF providers, are expected to be UNPRI signatories, and should have a basic understanding of ESG aspects. The aim is to be above average on ESG, though they do not have to be top 10-20%.

Exclusions of controversial weapons e.g. cluster munitions, coal, gambling, tobacco and companies breaching global norms apply to direct investments, while external managers are expected to be UNPRI signatories and exclude cluster munitions.

Outlook

In mid-2024 Assenagon remain broadly constructive on risk assets. They judge equity valuations outside the US are within normal ranges and expect slowing inflation will allow for more rate cuts, with some already seen in the Eurozone, Switzerland and Sweden, as well as China. They are also cognizant of weaker economic growth in China and Germany, and potentially escalating geopolitical risks.