Michael Dicks, Chief Economist and Deputy Head of Research at PGIM Wadhwani, discusses the investment strategy of the PGIM Wadhwani Keynes Systematic Absolute Return Fund and explores how an agile global macro liquid alts strategy could adjust quickly to market volatility, deliver uncorrelated returns and help investors diversify portfolios.
Q. What is the Fund's strategy and what you are trying to achieve for investors?
A. We strive to offer investors results that can't be achieved through long-only approaches using traditional asset classes. The Fund employs a systematic macro strategy that offers investors diversification from the traditional capital markets through liquid alternative solutions. Our portfolio takes both long and short positions in stocks, bonds and currencies, and seeks to deliver returns that are uncorrelated to equities and bonds over a full market cycle.
We aim to deliver a positive return of the London Interbank Offered Rate, plus 5%, while simultaneously attempting to limit drawdowns, with a volatility target of 7%1. The Fund has held up well over the recent market turmoil. It was ranked first year-to-date out of 880 funds in The Investment Association's ‘Flexible Investment' category and third over one year out of 847 funds.2 That builds on a seven-year track record of the Fund achieving its targeted information ratio. Past performance does not predict future returns.
Q. What is the make-up of the Fund's investment team?
A. Dr. Sushil Wadhwani, CBE, Chief Investment Officer, leads a team of about two dozen investment professionals. Dr. Wadhwani has more than 30 years of investment experience3 and sat on the Bank of England's Monetary Policy Committee before founding the London-based multi-asset macro specialist now known as PGIM Wadhwani.
Q. How are you positioning the portfolio in these uncertain times?
A. Uncertainty is good for our strategy. A volatile environment marked by macro-economic and, especially, policy uncertainty represents an ideal backdrop for our approach. The Fund's success through the first nine months of 2022 drives the point home considering how volatile this year has been.4
Portfolio positioning reflects our scepticism regarding policy. Our models were sceptical that policymakers would be able to deliver a soft landing. As a result, we've been short on the front end of the yield curve in fixed income, short equities and long the dollar - and we still have these positions today.5
Q. Do you expect positive demand for liquid alts and the Fund's approach in 2023? If so, why?
A. Yes, we see positive demand trends continuing. Traditional investors are being forced to face the fact that bonds have not protected their equity holdings this year because inflation turned out to be higher than expected. Policymakers are admitting that it will take time to get inflation back under control. Even when that happens, it is not clear that fixed income will necessarily be a good hedge moving forward. It may be that interest rates trend higher, reversing the trend we've seen over the past several decades.
Bonds may no longer offer protection for long holdings in equities. So investors may want to consider systematic macro strategies that seek to go short both equities and bonds when inflation surprises on the high side.
Thanks to directional trading and the ability to diversify across investment styles, strategies and asset classes6, our systematic macro approach was able to defy prevailing trends this year through September4, a period in which a traditional 60/40 portfolio would have declined 23.5%7.
To learn more, please visit our liquid alternatives website.
This post is funded by PGM Investments
1Target objectives and downside protection cannot be guaranteed
2Source: The Investment Association, calculated by Morningstar, as of 31 July 2022.
3 Source: PGIM Wadhwani, as of 30 September 2022.
4Past performance does not predict future returns
5All holdings and/or allocations are subject to change.
6 Diversification does not assure a profit or protect against loss in declining markets.
7Morningstar Direct, PGIM Wadhwani as of 30 September 2022. 60/40 represented by 60% S&P and 40% Bloomberg U.S. Aggregate Bond Index
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