Moving into the summer months, investors are still feeling the reverberations of one of the most turbulent opening quarters in recent history. But what can we learn from the first quarter of another year without precedent? Yahoo Finance spoke to a CEO of a multi-manager alternatives firm, whose trading-oriented approach took the volatility in its stride.
As societies slowly begin to open up again, many analysts are cautiously seeking to manage expectations when it comes to the prospect of a return to normal. If the past year has taught investors and fund managers anything, it is that new variants of volatility are always just around the corner.
The first few months of the year led to a wide variation in performance for actively managed funds. This was due in part to factors outside of fund managers’ control. But arguably not all funds are created equal when it comes to managing short-term volatility.
Based in London, Coleman Group is an alternative investment firm, offering fund & customised solutions to professional investors and family offices. With a performance and risk-centric investment culture, the firm focuses on trading-oriented strategies. The firm claims to have a ‘trading DNA’, with each of its fund managers possessing extensive trading experience. The group has performed well in the last three years and throughout the pandemic, with its top performing Credit Long/Short strategy annualising +13.9% net since January 2018.
I spoke to Matt McClean, Coleman Group’s CEO, about the lessons of the past three months and why he thinks trading-oriented strategies are weathering the market gyrations.
“The first quarter of 2021 was a tricky period for absolute return investors, but as a firm with a strong background in trading, I think it would be fair to say that Coleman wasn’t entirely surprised by the trends, which have been years in the making,” says McClean. “Financial markets were and remain in a highly speculative phase of the investment cycle. There is the combination of unprecedented fiscal & monetary stimulus, coupled with no commission trading, which has helped fuel a frenzied appetite for risk assets, which in turn sparked some extraordinary price behaviour.”
According to McClean, the turbulent events surrounding the SPAC boom, Reddit and Gamestop Corp were symptomatic of late stage market cycles with excess liquidity and leverage. A new generation of retail investors dipped their toes into the markets: “More transparent information and the rise of low fee investment platforms did help democratise equity investing for retail investors. There is clear need for investors to risk manage this change accordingly.” Investors in small-cap companies, where lower liquidity puts stocks at risk of disproportionate price moves, should be aware of the risks.
McClean sees the start of this year as having been unique for the disproportionate influence of social and political volatility as contributing factors to the financial turbulence. He emphasises that as fiduciaries of client capital, his firm is politically agnostic - “we believe the short-term influence of politics is often over emphasised. Medium term however, understanding political social trends is important in asset allocation.”
Especially important in his view is the growing distrust of traditional institutions, from central governments to the media, that has been witnessed across the world over the course of the past year, which he sees as a major development with the potential to affect asset values.
In his view such trends are important signifiers of the prospects for stable conditions in a range of key markets. “The lack of trust in the competency and ethics of major institutions is a global problem.”
The problem seems particularly acute in the United States however. “We’re definitely thinking carefully about our stance towards the US in light of these trends. Historically they’ve had a robust political system which promoted entrepreneurship and growth. This brought about a reliable pool of investor capital which gave the country a superior growth profile, helping US assets trade at consistently healthy valuation premiums compared to its global peers. I think it will continue to be the world’s largest economy for some time to come, but it’s not clear how calm their waters will be in the coming years.”
McClean thinks that while liquidity will remain a key market driver, and the return of inflation is one to watch, the deteriorating global relationship between ordinary people and major institutions is a risk factor that needs close monitoring. “When populations begin to lose trust in institutions and political norms slip away, it’s a sign that civil unrest and political turbulence is just around the corner. Markets like calm and stable political regimes – volatility in politics can lead to bear markets and depressed asset valuations.”
In the months ahead, according to McClean, investors should be following the news on global politics as closely as they follow the markets.