Life is a marathon, not a sprint,’ a well-known adage whose message transcends professions and beliefs, but for Hans Abate it is not just a motto, it is a way of life.
The head of portfolio management for EFG Asset Management Americas in Miami is a veteran of the investment world, having begun his career as a credit analyst back in 1985. Despite surviving more market crashes than he cares to remember, from Black Monday to the creatively named Tequila crisis, Abate felt he needed to take on another challenge at the height of the 2008 financial crisis – an Ironman triathlon.
Fast forward seven years, Abate has two Ironman medals, completed numerous other triathlons and believes the character traits required to complete such a gruelling physical challenge are the same long-term investors need to survive in today’s marketplace.
‘What’s important is having the discipline to adhere to a plan, stay away from distractions and avoid the temptation of abandoning that plan through fear, by understanding wisely and effectively what you want and need to do,’ says Abate.
‘You need to have a clear mental commitment that drives you through the race – and the markets.’
Too often, he says, investors are quick to forsake their commitments, lacking the endurance to weather what can be a short-term storm.
‘I’ve seen this in all of the prior crises I’ve lived through, you come across many investors that are very reactive to macro distractions or “noise”, who quickly abandon their true objective in pursuit of a quick return at the expense of higher long-term returns. Over my career that is really what has stuck with me, you need to have really strong discipline, diversify wisely and adhere to a plan of action.’
Miami is a perfect fit for Abate, with its melting pot of Latin and Western cultures. Having been brought up in a household with an Italian father and German mother he describes himself as a bit of a hybrid, growing up in Venezuela and Colombia, where for him speaking Italian, German and Spanish was the norm.
This cross-culture experience served him well when he joined EFG in 2005 and was tasked with setting up its asset management platform in the Americas. Today he runs $1.7 billion in assets and has a 22-strong team of fund managers, analysts and back office staff to support him.
‘This world has become very desynchronized in terms of growth, with historically low levels of interest rates and in
that context we continue to favour equities as our preferred asset class, followed by selected areas within bonds,’ he tells me from his office on Brickell Avenue, Miami’s Wall Street.
Last year was also a time when his team selection process and Abate’s own mental strength was seriously put to the test.
‘2014 is a year that will stick in many investors’ minds as the year when many active managers failed to provide outperformance,’ says Abate.
‘Now with extremes in outperformances last year in some of the largest companies and market cap divergences, especially between large and smaller companies, we think 2015 will bring a comeback and a reversion to the mean. Hopefully this year we should see more of a tailwind for active management than any other year we’ve had in the past.’
To take advantage of this environment Abate has been making certain tactical changes, tweaking his selection criteria to hone in on high conviction-driven fund managers who can offer him flexibility and a distinctive approach to their market peers.
‘The evolution has been out of core and main asset classes into more specialized and granular managers seeking alpha that will allow us to ultimately achieve our clients’ investment objectives in an efficient way.’
Since the start of the year he has gone overweight European equity, opting for US dollar-hedged share classes as the dollar shows no sign of weakening and he wanted to minimize the volatility still present in the market.
However, adopting this approach has not been plain sailing. ‘I was surprised that a lot of managers didn’t have one [US dollar hedged share class] in place but they were able to accommodate us. That also shows you the historical approach of US investors whose international focus has not been as strong as their focus towards their domestic market.
One of the funds he holds for his European exposure is Thorsten Winkelmann’s Allianz Europe Equity Growth fund, a multi-cap strategy where the manager employs a strong conviction approach to investing in the region, a manager trait high on Abate’s wish-list.
‘We are excited about Europe’s revival with a tailwind of positive outcomes starting with the announcement of the much anticipated program of quantitative easing. Some caution is still warranted considering that they still face scepticism from many investors – confidence factors need to be rebuilt – as well as some open geopolitical issues.
‘However, the tailwind is supported by many other factors such as their commitment to continued structural reforms and a weak euro that is helping exporters by making their products more competitive. The torrid decline in the oil price has also provided real income to consumers resulting in a net benefit to discretionary spending.’
The oil price decline has also led Abate to maintain a watchful eye on the US energy sector.
While it has been a blessing for oil importing countries and many businesses, exposure to this sector has hurt many investors. Abate wanted to make sure he did not fall into that category.
‘Our analysts went through all our funds to make sure we knew what our energy exposure was, not only with the equity but also with fixed income managers. That helped us manage our overall risk within the energy sector, especially last year as we had an underweight to energy and we wanted to make sure all our managers weren’t contrarian to our views.‘
A correction in the energy sector will be a signal for him to further tilt his allocation to the US, a country where he is currently overweighting growth stocks.
‘We believe the overall trend in the US remains supportive to our position, although there is likely to be greater volatility in the coming months linked to greater FOMC uncertainty.’
Avoid the conventional
Within fixed income, Abate is shying away from the more conventional bond managers, reflecting once again his focus on high conviction investors, as historically low levels of yields and extremely tight bond spreads continue to affect the market.
‘In the high yield space we need to find managers with more of a proven edge of being able to diversify away from passive or index based management, while offering us adequate and acceptable levels of volatility with uncovered value.’
Another change he has made is to upgrade his high yield and emerging market ranges from short-to-mid duration to a tactical overweight, driven mainly by last year’s sell-off, which was largely attributed to the energy dislocation. ‘As a result we aimed for single positions as well as selected managers that offered higher duration.
‘In emerging markets we have mostly remained in hard currency or blended funds as local interest rates have started to ease in addition to risks of currency devaluations. This is an area that can experience a bounce at some point, so we need managers that understand those markets well and are able to time the entrance points.’
The Neuberger Berman High Yield Bond fund, run by Ann Benjamin, Russ Covode and Tom O’Reilly, is one of the strategies he invests in for this purpose, as well as the Lazard Emerging Market Debt Blend fund, run by Citywire + rated duo Denise Simon and Arif Joshi. The Pioneer Funds US High Yield – run by Andrew Feltus and Citywire A-rated Tracy Wright – is another in his stable.
Unconstrained bond funds are another type of strategy he is investing in, through vehicles such as the Legg Mason Brandywine Global Opportunity Fixed Income fund, run by Citywire AAA-rated trio David Hoffman, Jack McIntyre and Stephen Smith. The popularity of such funds has grown tremendously, but Abate insists that for him they are used only as a complement to his bond allocation.
‘You can’t abandon the core fixed income market, especially if you are a global manager pursuing a long-term investment objective; they need to be satellite components of your portfolio.
‘Some of these funds can appear as a black box or extremely thematic as they are mostly sold as a talented group of managers, á la hedge funds. Their volatility models can be riskier and in some cases more correlated to risky assets compared to core managers, so one needs to be extremely careful and fully do the due diligence.’
‘They do help us to maintain competitive returns within the areas of fixed income, currency, credit, and yield curve, but we can’t afford to lose our understanding of their individual or concentrated bets in markets, durations or other sorts of elements that we don’t follow closely or that lack liquidity.’
Emerging markets are still on his wanted list, where Abate is finding opportunities in the consumer theme in countries such as Indonesia. Some of the funds he currently holds for this allocation are the Macquarie Asia New Stars, Value Partners Global Emerging Markets and the Schroder ISF QUEP Global Emerging Markets.
However, his outlook darkens when it comes to Latin America.
‘In general terms the cyclical and structural outlook has deteriorated, not only due to the commodity downfall, but also most countries have suffered from complex political pressures, so it’s a bit of a double whammy right now.’
Lower commodity prices, specifically oil, are a headwind for productivity. ‘It is important to keep watching this space as although the pricing is above break-even costs, the low price is affecting growth and lowering confidence.’
Ongoing political turmoil makes reading these markets very difficult as you are dealing with a variety of uncertainties in the short end, he says.
‘I have no issues in the long term and we may look back and say now was a good time to go into this market, but on the other hand it may be best to sit on the sidelines for a while before we are comfortable.’
‘But for now we are underweight Latin America and we are being very selective in the credits and countries we invest in. You can’t discount all of them and while we are encountering difficulties in countries like Brazil, there are still some solid credits and opportunistic plays to be found there.’
To tap these opportunities he is directing his exposure towards managers with knowledge of the mid cap sector and who can combine hard and local currency plays. ‘We have kept away from local currency-only dedicated funds, but at some point we want to go back to them or use the blended funds to opportunistically manage that kind of exposure. We also want managers that can overweight the countries we are more favourable to, like Mexico, and that are well diversified and not concentrated in the energy sector.’