Barjou, who runs the range alongside Cedric Baron, says the strong rally from equity markets and the fact that interest rates are set to rise could herald a bubble, but adds there is currently no reason to expect a market sell-off. Still, she agrees investors should be vigilant. “Equity markets won’t achieve double-digit returns this year,” she said.
“I don’t like saying the word bubble because I don’t think we’re there yet, but I do think 2014 is a year we’ll start to see valuations stretched.”
“There are well-identified risks and the cyclical and systemic risks have diminished. There’s no real reason to expect a market sell-off and no reason for a market crash – meaning a 20 per cent decline in equity markets.”
However, she does expect to see more volatility throughout the year.
“You want to be in the market and don’t want to be out of the market, but it won’t be an easy ride. We will have to take that into account. It’s not a year for buy and hold. 2014 is a year for active management,” she said.
The manager adds asset allocation is much less obvious than it was at the start of 2013.
“There’s a big difference between this year and last year. All the valuation distortions have disappeared,” she said.
“It was clear last year that you wanted to be underweight bonds and overweight equities because they were cheap. Today it’s different because equities have rallied so much.”
However, the manager says the same trends that led the market rally in 2013 will dominate market sentiment in 2014, but investors should be aware they won’t see equities storm ahead over the next 12 months.
“Both interest rates and equity markets are set to increase, but we expect this to be more subdued,” she said.
“The main risk we have is interest rates oversizing and equities are much more sensitive to a [rising] interest rate scenario.”
Barjou says rising interest rates are the biggest threat to markets this year, but she doesn’t expect them to spike significantly. This gives her confidence the market will take a rate-rise in its stride.
“Interest rates won’t move significantly higher, the Fed made clear they want to support growth and will sway on the more dovish side,” she said.
“The risk is quite priced-in by the market. It is a risk to the central scenario but a risk everyone has in mind, which often makes it less of a risk.”
Beyond rising interest rates, Barjou points to Europe as another catalyst for market upset, highlighting the low levels of growth which have left the region teetering on the edge of recovery or recession.
“If there is insufficient growth in Europe, the debt spiral story revives itself,” she warned. “Nominal GDP is still very low and not sufficient to stop most countries from entering a debt spiral in the current conditions.”
“Things are better in Europe but we’re not totally out of the woods.”
Barjou says as an absolute return manager, she wants to be more reactive in the face of increased volatility this year. In the ARMA range of funds, she does this by quickly adjusting her exposure to asset classes such as bonds, equities, commodities and cash to protect against major market events.
She warns investors to avoid bonds and instead look towards riskier segments of the market to drive returns.
“It’s impossible to say equity markets are cheap, they are either fairly well valued or expensive,” she said. “They can still get more expensive, but not by much. But where do you invest? There’s only one market still bringing in dividend growth and attractive payouts, and that’s equity markets.”
The ARMA range, which is similar to the multi-billion pound Standard Life GARS strategy in the UK, aims to deliver stable absolute returns while limiting the risk of negative performance. The fund is long-only and doesn’t use short positions to hedge risk.
As Barjou explains, the fund uses cash tactically to protect capital in falling markets. The more cautious ARMA strategy targets annualised volatility below 3 per cent, while the more aggressive ARMA 8 strategy has a target volatility of below 8 per cent.
The strategy is much smaller than GARS, with £350m in assets under management. The funds have outperformed their FCA Offshore Recognised sector since launch – three years in the case of the cautious ARMA fund and one year for ARMA 8.
The ARMA 8 and ARMA funds have gained 5.42 and 0.82 per cent respectively over the last 12 months. The sector gained 1.3 per cent over this period, according to FE Analytics.
Performance of funds vs sector over 1yr
Source: FE Analytics
What is most important for absolute return strategies is their ability to deliver positive returns over specified rolling periods – 12 months in the case of ARMA.
The ARMA 8 fund made 11.7 per cent in 2013, more than doubling the returns of the sector. The longer-running ARMA fund delivered positive returns in 2012 and 2013, but lost 0.57 per cent in 2011. This was still ahead of the sector, which lost 3.76 per cent that year. The fund is benchmarked against cash, which it has beaten in every calendar year apart from 2011.
Source: FE Analytics
Both funds are down so far in 2014.
ARMA funds are available for a £250,000 minimum initial investment directly. Lyxor is rolling out the funds to retail investors via platforms in the first quarter of 2014.
