Former White House chief of staff Rahm Emanuel was once famously quoted in the Wall Street Journal as saying ‘You never want a serious crisis to go to waste.’
Now under heavy fire as mayor of Chicago, he arguably has too many crises to choose from. But the contrarian spirit of his words still rings true for William Blair – one the city’s older asset managers – and its Macro Allocation fund, which is run by Thomas Clarke and Brian Singer.
The fund is ‘re-risking’ and for Clarke, who oversees currency allocations within the $1.5 billion global macro strategy, this has meant taking on the geopolitical risk of populist movements. ‘Last year… you were going to be highly paid if you took downside geopolitical tail risk, populist-inspired risk,’ he said. ‘We eventually decided we wanted to do that. We are still re-risking because there has been plenty of reasons to do so and not many to hold back. There is a slight niggle about whether the world is getting complacent, but you can’t worry about that all the time. It is generally an environment to take risks because they are more highly compensated than they were before.
‘Broadly the opportunity is to be long emerging and short developed. I wish that was massively oversimplifying it, but it’s not.’
Here are three of Clarke’s top currency calls.
Sterling’s silver lining
Despite the fund’s general aversion to developed currencies, it has made one exception: the British pound, following its drop in value after the Brexit vote last year.
Clarke said the currency had previously been overvalued and so the fund was short, but moved to being neutral before taking a long position in September 2016. It has more recently added to this position and believes that the recent general election, which saw the broadly pro-Brexit Conservative party throw away a healthy majority, will benefit the pound.
‘The Conservative government’s self-inflicted wound probably, on balance, helps,’ he said.
‘The UK now has much less bargaining power than it once had, whereas the EU has more because of France, Holland and the populist wave receding a little bit. Although they have a weak and unstable government in the UK there are others things that have happened that have improved the outlook for markets. Bear in mind that a soft Brexit is better and will be less of a hit for growth.’
‘A softer Brexit and no second vote on Scottish independence... that has improved the relative risk around investing in the British pound and equities, even though you had a botched election.’
Wall of noise
The fund has been long on the Mexican peso for a long time – a position that hurt performance in 2016 thanks to Donald Trump, but the call has been positive this year.
Clarke was also clever in cutting the position in the run-up to the election and buying it back for less afterwards, first in December 2016 and topping up further in February, March and April this year.
‘We actually managed to buy at cheaper levels than we sold it,’ he said. ‘That’s not actually something that’s very easy to do. We cut it because the Trump risk was one we did not want to take. Even though he was not expected to win, there was a probability he would and it was another thing that was negative for Mexico on top of the commodity cycle.
‘The opportunity [to buy back] got big enough so we responded and it seems like the bark is worse than the bite with much of the Trump agenda. Either he loses interest or things have to wait their turn.’
‘They have their own version of Trump,’ said Clarke, referring to Filipino president Rodrigo Duterte.
‘[He’s] a radical maverick president who says what he likes and is a populist… [But] the regulatory institutions are of decent quality there. The fundamentals of the economy, the growth rate, inflation and things like that are fine.
‘You have had – as you had with several emerging countries where there has been a sharp weakening in the currency – a spike in inflation which looks worrying while it lasts. You think “what if double digit inflation expectations get entrenched and go back to being the norm”, but it’s very unlikely.’
The fund has increased its position in the currency over the last three months and it now accounts for around 5% of the portfolio.