IAM Expects Asian Growth, Fears European Sovereign Debt in 2011

Feb 10 2011 | 8:54am ET

Morten Spenner, CEO of International Asset Management, the $2.8 billion fund of funds, expects equity markets to “continue to benefit from supportive macroeconomic policies” in 2011 but is still worried about the solvency of “peripheral European countries.”

IAM released its 2011 outlook this week, considering a broad range of strategies. Macro and trend follower/CTA strategies are seen as high risk with neutral return outlooks. Long/short equities, credit and event-driven strategies have positive return outlooks with medium risk while fixed income relative value strategies have a neutral return outlook with medium risk. 

 In terms of long/short equity, the London-based fund of funds expects Asian and emerging markets to offer the highest growth opportunities, but sees potential headwinds from sovereign debt concerns, a potential increase in base rates and tightening monetary conditions in China.
“Last year downside protection in equity long/short strategies were robust and in line with historic averages. We expect this downside capture profile to be maintained this year but for the strategy to offer attractive risk/rewards as the capture by managers of upside returns reverts to historic norms.”

In the credit space, IAM says that while bond and loan prices have strengthened, there remain “pockets of value.” The firm expects the large volume of debt maturing after 2011 to provide managers with interesting potential trades “on both sides of their portfolios” and favors managers with “a long/short approach in the strategy with fundamental credit,  balance sheet analysis skills and technical trading experience.”
 
In terms of macro strategies, IAM favors managers with a bias toward commodities or emerging markets. “Strong risk management skills in these areas are essential. Managers focused on fixed income markets should also have the opportunity to provide reasonable returns.”

Event-driven strategies may benefit from increases in M&A volumes thanks to “constructive conditions in equity markets, high corporate cash levels and strategic need for deals.” IAM thinks the low-interest environment may also encourage LBO activity. Investors with strong sourcing and workout capabilities may benefit from the lack of improvement in the default rate of companies with capital structures less than $1 billion. IAM favors multi-strategy event-driven managers.

In the fixed income space, IAM says rising bond volatility will “continue to help create opportunities for trading oriented managers.” In addition, massive U.S. government auctions will provide recurring trading opportunities.
 
Among trend followers and CTAs, IAM, in the long term, continues to favor “highly experienced managers that constantly evolve their trading models and invest in their infrastructure and systems.”

“CTAs exposure still provides good diversification benefits to portfolios but this benefit is currently reduced by their present long equity and commodities biases however we believe the trends in equities and commodities are most likely to drive positive returns this year.”


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