the question, but there is
no such thing as perfect
timing for authorities so
inflation will become a
problem,” explains Ana.
With inflation seemingly
under control in Western
economies for now, the
team does not follow the
consensus view that the
Fed will raise interest rates
in 2010, believing the
economy is still too weak.
But there has already been
evidence of inflation in
large emerging markets
such as India and Brazil
where energy prices are
already starting to rise.
l Commodities
Given these concerns, real
assets make up an important
part of the make-up of
the funds, with the flagship
Diversified Dynamic
Solution currently holding
around 18% in commodities
(including both long
and short positions)
through futures, ETFs,
ETCs and swaps.
There is a sizeable play
on agriculture in the fund,
backed by the fundamental
macro themes of an
increased global population,
changing eating habits
in Asia, limited supply of
land and low inventory
levels, and the impact of
global warming.
Says Patrick: “The volatility
is around 35% to 45%
but in agriculture you have
non-perfect correlation.
Soya beans, coffee and
sugar each have their own
drivers so individually they
are quite volatile but put
them together and you can
bring that volatility down.”
But the biggest short
position in the portfolio, at
around 13%, is the Goldman
Sachs Commodity Index,
which Patrick attacks as
being “ridiculously inefficient”.
He says that the
$150bn tracking the index
is from pension funds.
“This index is 24 commodities
and it is not the
commodities you are buying,
its futures that expire
every month,” he explains.
“Everyone who takes the
time to understand the
mechanism of this index
knows where $150bn is
going to be next month –
chasing those sets of
futures. So we just buy the
futures and short the
index and that simple strategy
gets us about a
7% return.”
l Brazil
In terms of general equity
exposure, the Armstrongs
again prefer to use passive
funds as well as shorts and
put options. Their most
favoured country is Brazil,
which ticks boxes given its
fiscal and current account
surpluses as well as a
useful play on agriculture
and energy.
“We only like Brazil of
the BRIC countries because
it is trading at a lot less
ASSET ALLOCATOR ARMSTRONG INVESTMENT MANAGERS
than the other three – China
is trading at 29x earnings,
India is at 28x and Russia is
at 18x, which is in line
with the S&P in Brazil but
Russian interest rates are at
7% so it should be at a discount
to P/E multiples we
believe,” Patrick remarks.
“There is a huge disparity
across those emerging
markets, they are all together
very different. But in
buying Brazil you do not
get the corporate governance
issues of Russia, nor
the huge multiples you
have in India and China.
So we think Brazil versus
those other countries is
incredible value.”
The team also uses
Brazil for its government
bond exposure, and currently
also has exposure to
Greece 2012 given its mispricing
at the height of that
country’s sovereign crisis.
Diversified Dynamic Solution Fund alloc’n
Equity
Short equity
Absolute eqty
Government
Credit
Fix inc hedge
Commodities
Property
Cash
l Corporate bonds
-30 -20 -10 0 10 20 30 40
%
Source: Armstrong Investment Managers
As with its exposure to
commodities, the team
uses a shrewd approach to
buying corporate bonds
with 30% long exposure
and 30% hedged exposure
through protection.
“It costs us 60bps to buy
protection on the iTraxx
Index,” Patrick says. “For
that we get a risk-free
return as we have hedged
away the risk. After
Lehmans blew up, cash
market spreads widened
because of counterparty
risk and forced sellers.
Things are not back to
normal yet, so you can buy
a bond with insurance on
it and still get a significant
carry. That is nowhere near
the underlying swap
spreads. It is 60bps but
actually costs nothing
when you put it in combination
with higher yielding
cash bonds – it is a free
hedge for us right now.”
l Alternatives
Alternatives exposure consists
of around 10% in
property; particularly Asian
property which Ana points
out is helped by a strong
trend of money moving out
of China as consumers look
to buy properties in Hong
Kong and Singapore.
MAY 2010 [www.portfolio-adviser.com] PORTFOLIO ADVISER
Long
Short
The team is also keen
on water-related investments,
a theme they say is
a long-term growth area
as related stocks have generally
not participated in
the S&P 500’s cyclical rally
of the past year. They
invest via an exchangetraded
fund, IH20, and two
listed equities, Japan-based
Kurita Water Industries and
Duoyuan Global Water,
a Chinese water purification
firm.
SUMMARY
Armstrong Investment
Managers was set up in June
2009, with its first two funds,
Diversified Dynamic Solution
and Diversified Real Return,
launched in January 2010.
The team follows both
a qualitative and quantitative
research process which
uses various proprietary
in-house tools.
Equities are accessed
primarily through passive
funds, while the team is keen
on hedging its exposure to the
major asset classes.
“
How perfectly
can they fine tune
and withdraw the
increased money
supply out of the
system? That is the
question, but there
is no such thing
as perfect timing
for authorities so
inflation will become
a problem
”
Ana Cukic Armstrong, joint
managing partner and head of
portfolio strategy, Armstrong
Investment Managers
43
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