Managing volatility risks with Columbia Threadneedle

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Despite a big uncertainty and shutdowns in economic activity due to Coronavirus, Columbia Threadneedle is continuing to focus on strong business models and companies which can ride out the storm. In today’s interview we are going to speak about volatility risks and portfolio management, Alpha and other issues with Frederic Jeanmaire, Manager of the Threadneedle Pan European Focus Fund, Co-manager of the Threadneedle European Fund and Co-manager of the Threadneedle (Lux) Pan European Absolute Alpha Fund.

Focusing on strong  business models

Quantilia: 2019 was a year full of fears that didn’t realise. Now we are several months into 2020, and we start to see some bigger market movements, and the return of volatility. What can we expect for 2020?

Frederic Jeanmaire : Coronavirus has created much uncertainty and shutdowns in economic activity in a number of areas.  Volatility will continue until we have a clearer picture of the impacts both long and short term.  Rather than trying to second-guess the medical  and social  incomes and their impacts on economic activity –  an area where medical, government and economic specialists have yet to reach  any realistic conclusions – we are continuing to focus on strong  business models and companies which can ride out the storm.

Quantilia: The funds that you manage/co-manage have 100% European exposure, how much growth is there ahead for Europe in a world split between USA and China blocks? What does this future European growth depend on, in the context of globalization being penalized by tariffs war and new trade barriers. Finally, how do you adapt your portfolios for these new scenarios and exogenous factors?

Frederic Jeanmaire : Our approach to managing our client portfolios is mainly bottom-up.  High-quality companies can find good opportunities in all the main economic trading blocks.  Our ability to identify business models that can generate sustainably high returns means that our stocks are often resilient in the fact of tariffs and changing  trade regulations.  Given the uncertainties surrounding policies and projections of these, calculating the impact of trade changes is an integral part, but a small integral part, of our research.

Volatility risk and portfolio management

Quantilia: March has seen the return of volatility spikes in equity markets. Threadneedle Pan European Focus Fund is a high conviction fund, with flexibility to take significant sector or stock positions. How is volatility risk addressed in the portfolio management?

Frederic Jeanmaire : We do not specifically target a level of volatility for the portfolio, but we monitor volatility using a range of measures.  We expect volatility to be lower than that for the overall market and for benchmark indices; this has been the case in the past, and continues to be the case in recent weeks.

Quantilia: How is Threadneedle Pan European Focus Fund positioned versus its peers? What do you do differently and what makes this fund unique?

Frederic Jeanmaire : Our focus is on long-term sustainable business models – companies that have competitive advantage that enables pricing power and strong, stable,  growing and sustainable returns.  We do not adjust the portfolio on the basis of short-term changes in economic circumstances, but expect it to outperform long-term throughout the cycle, as has been the case in the past.  Short term poor-quality cyclical rallies we sometimes fail to match, but we have tended to outperform in more rational and correction phases.

Quantilia: At Quantilia, we take Alpha very seriously and have a taste for Absolute Return strategies. What kind of alpha are you extracting from markets in the Threadneedle Pan European Absolute Alpha Fund? How would you describe your absolute return management style?

Frederic Jeanmaire : The style mirrors that of the long-only portfolios, and the long book of the absolute return fund mirrors the portfolio of the Focus fund.  We use our research resources to identify high-quality business models for the long book, and also to identify flawed, fracture business models for shorts.  We use Porter’s Five Forces (derived from Professor Michael Porter’s Harvard Business School model) to evaluate industries’ and companies’ strengths.

We are extracting alpha from our short book at this time of market weakness – the short positions are in stocks which are generally performing less well than the market.  The long book is outperforming the market index, albeit has achieved weak absolute returns over the year to date.

About Columbia Threadneedle Investments

Columbia Threadneedle Investments is a leading global asset manager that provides a broad range of actively managed investment strategies and solutions for individual, institutional and corporate clients around the world. With more than 2000 people including over 450 investment professionals based in North America, Europe and Asia, we manage €440 billion (as at 31 Dec 2019) of assets across developed and emerging market equities, fixed income, asset allocation solutions and alternatives.