"It is surprising how few (if any) traditional pension funds allocate to 'discretionary global macro' funds," says Cardano's James Balcombe.

Macroeconomic events continue to dominate global asset price moves more so than ever before.

Whether it is the announcement of more central bank stimulus (or less in Bernanke's case), a change in government fiscal policies, political unrest or the release of regular global economic statistics, these events continue to provide a clue to developing economic themes and future market direction.
Given this, it is surprising how few (if any) traditional pension funds allocate to 'discretionary global macro' funds.

Unlike more traditional asset managers, global macro managers are skilled in being able to profit from market moves driven by economic, political or government related events. They are able to trade a range of highly liquid asset classes (such as stocks, bonds, commodities and currencies) across various geographical regions. Their flexible trading approach allows profits to be made in both rising and falling markets through the use of long and short positions. Most, if not all, are staffed by highly regarded economists and ex-central bank officials who use their analytical skill and vast people networks to decipher macroeconomic variables and their potential impact on global asset prices.

While their seemingly unrestricted 'go anywhere' approach may raise concerns for some, reassurance should be sought from the strict risk management policies they operate. Downside risks are continuously managed through the use of stop losses and automatic risk reduction techniques. This is in comparison to more traditional asset managers who aren't so focussed on preserving capital and have the potential to incur large losses if they get their investment view badly wrong.

Given that risk management is a core part of their investment process, it is unsurprising that global macro managers often produce very high 'risk-adjusted' returns. For example, since 2000, the global macro industry has achieved an annualised return of over four times higher than global equities but with only around a third of the volatility. Significantly, global macro returns have very low correlations to more traditional asset classes given the active trading strategy they follow. Even more importantly, this diversification continues to hold true during market stress events. This includes the depths of the financial crisis in 2008 when global equities fell over 40% while global macro managers returned a respectable 3%.

At Cardano, we have typically allocated around 20% of our client's capital to global macro managers, as we seek to design a portfolio that can provide stable risk-adjusted returns across various economic scenarios. We think global macro managers are especially useful during inflationary and recessionary environments, where more traditional equity and credit strategies often struggle.

While it is true global macro managers are comparatively expensive to more traditional strategies and 'best of breed' capacity can be scarce, their low correlation and ability to profit in up and down markets remains a highly attractive investment proposition. Choosing the right mix of investment strategies remains an important consideration of any pension fund manager when building a diversified 'all-weather' portfolio. Therefore we ask: do you have enough global macro in your portfolio?

Written by James Balcombe, client team, Cardano

J.Balcombe@cardano.com