Stockholm (HedgeNordic) – Managing an investment portfolio can involve a wide array of approaches and strategies. Erik Penser Bank, a Swedish private bank, distinguishes itself through its active approach to managing investment portfolios for its wealth management clients. The bank’s Head of Asset Management, Jonas Thulin, believes in the importance of adapting allocations based on the prevailing market environment, allowing them to seize opportunities and effectively navigate through changing market conditions. Erik Penser Bank extends this active mindset to all investor portfolios, including their equity components.
“To put it simply, we quantify the macroeconomics to decide on our allocations.”
“To put it simply, we quantify the macroeconomics to decide on our allocations,” starts Thulin. The team at Erik Penser Bank has developed an econometric quantitative framework that analyzes a vast amount of high-frequency data on technical, fundamental, economic, liquidity, valuation indicators, and more, to better understand the current macro environment. “The framework uses artificial intelligence to analyze all the macro and financial stress data every single day,” he explains. Thulin emphasizes that their concept of macro data includes a wide range of financial stress data beyond just GDP and industrial data indicators. “For us, macro data includes a lot of financial stress data such as spreads, and liquidity pricing as well. All that is macro data to us, too.”
No Reasons to be Underweight Equities
Through a daily evaluation process, the econometric framework provides insights into asset class positioning, such as equities, for the next 12 months. “Statistically, our average holding period for an equity strategy is six months. We change the broader asset allocation once or twice a year, not more than that,” explains Thulin. In recent years, there have been few reasons to be underweight equities, even with the onset of the coronavirus pandemic. “We haven’t seen a reason for quite some time to be underweight equities,” emphasizes Thulin.
“We haven’t seen a reason for quite some time to be underweight equities.”
Even if investors have concerns about their equities exposure, there have not been any traditional alternatives, according to Thulin. “If your alternative is bonds, for example, being overweight equities would have been a better choice for the past three years,” he says. Thulin highlights that the allocation decision process takes into account alternatives to equities. “It is not an equity call by itself.”
The market environment of the past few years has underscored the importance of employing a tactical asset allocation approach. Thulin provides an example, “Let’s say you were overweight equities going into 2022 and all of a sudden we have this horrible war. Then we realize that rates will be equally as bad as equities in this environment due to continued rising inflation.” In such cases, simply shifting out of equities or adopting a neutral stance would not be sufficient. “We cannot just shift out of equities and pretend that we are doing a good job. We have to work smart tactically.”
“We cannot just shift out of equities and pretend that we are doing a good job. We have to work smart tactically.”
Erik Penser Bank can use spreads by taking long positions in one sector and short positions in another and can use derivative overlays, covered calls, or volatility protection within its equity strategies. “We work tactically with the risk exposures.” Instead of making hasty decisions based on nervousness and shifting funds to bonds, Thulin believes that working tactically within the equity market has proven to be a better choice.
Thulin notes that the period from 2020 to 2023 has been unique in that the maximum drawdown in bonds and equities was equal. “But only equities had upside, he highlights. “If you started with $100 on January 1, 2020, knowing that we would experience a pandemic, lockdowns, subsequent waves, a war, and skyrocketing inflation, many people might have thought it would be better to be risk-neutral or even underweight equities,” says Thulin. However, up to the present date, that has been a completely wrong call. “This has been a very specific period that we have gone through. A lot of old-school portfolio theories have been put to shame and the importance of tactical work has increased.”
Transition from From Low Growth, High Inflation to Low Growth, Normal Inflation
Erik Penser Bank’s econometric model identified a transition from a low growth, high inflation to an environment of low growth and normal inflation. This shift altered Thulin’s views on the trajectory of equity markets. “Up until last June, we had cash, short positions, volatility overlays, and a lot of dollar investments to minimize risks coming from our equities exposure,” explains Thulin. Realizing that a paradigm shift was approaching with the peak of inflation, Thulin and his team could anticipate where the pivot would happen.
“Up until last June, we had cash, short positions, volatility overlays, and a lot of dollar investments to minimize risks coming from our equities exposure.”
“There are a lot of definitions of what the pivot from the Fed is. But if you look at the maximum momentum of aggressive hiking priced into the market, that was in October last year,” explains Thulin. “We could see that already during the summer and realized it was the time to shift out of those positions and increase the exposure to equities. And that’s what we did.”
Expecting lower interest rates due to the transition to a low-growth, normal inflation environment, Thulin and his team increased exposure to longer-duration equities – particularly in “growth” companies. These are expected to generate the bulk of their cash flows in the distant future. “We are strong believers in very narrow and specific tech industries such as artificial intelligence, cybersecurity, and semiconductors, among others,” says Thulin. This belief has led them to build select exposure to markets like India and South Corea. “We are also ridiculously overweight US tech for the time being.”
Process
Erik Penser Bank’s active mindset starts by scanning over a million equity products every single day. “We start every day with a white paper, then survey the market and bring on board all the funds out there, including ETFs, ETNs, mutual funds, UCITS, non-UCITS, everything. Then we have the quantitative framework that identifies the best strategies for our mandates given by our customers.” They have specific requirements regarding volatility, Sortinos, returns, and more, resulting in a top list of strategies.
“We start every day with a white paper, then survey the market and bring on board all the funds out there, including ETFs, ETNs, mutual funds, UCITS, non-UCITS, everything.”
The team then compares this list with the existing portfolio exposure. “If the list is dominated by Nasdaq and tech today, we don’t have to do anything because we are already fully invested. We do also consider the macro perspective and evaluate if this exposure makes sense, and how the market has priced in future developments compared to where inflation is headed.”
Thulin points out that their investment decisions are not always complex but rather involve identifying trigger points and straightforward analysis. By accurately forecasting macro trends, they have made successful investments in areas like artificial intelligence, which have yielded solid returns. “It’s not rocket science all the time. It’s just a question of deriving the trigger points, which are quite fairly straightforward.”
