As academics and analysts scrambled to explain the wave of populism that hit the developed world in 2016, one portfolio manager barely raised an eyebrow.
In an update to investors in May, Singer (pictured below) explained that ‘populism is an important theme because a populous stands for nothing. A populous stands against something, and it’s very hard for the markets to incorporate a rejection, a rejection that occurs in the political sphere. But that influences asset prices, and because of that, we actually build that into our understanding of elections, including things like the Brexit vote. It’s very important for us.’
He is quick to point out that he did not forecast Donald Trump’s presidential election victory, but he was more prepared for it than most. ‘We did not predict a Trump win here in the US but we had a much higher probability of a Trump win than was priced into the market,’ he says.
Singer says he does not look for specific populist flashpoints but rather broader scenarios that may be conducive to its rise. ‘What are the triggers? I don’t know,’ he says. ‘But it’s the environment that’s more important.
‘I bet there’s not a person in the world who predicted that a Tunisian street vendor immolating himself would spark the Arab Spring, but the environment was such that that could actually happen.’
In developed countries, conditions that have given rise populism include slow growth, prolonged austerity and little to no income gains at the bottom end of the scale, according to Singer.
His decision to entertain the possibility of a Trump win saw him reduce exposure to the Mexican peso and short the country's equities ahead of the election result.
‘We anticipated the potential for a large downside event in the case of a Trump victory and were able to rest relatively easy [on election night] as the tide turned to Trump,’ his team said in an update to investors in the immediate aftermath of the election.
They were also quick to realize that Trump’s actions were failing to match his rhetoric, prompting them to buy back into the peso in December 2016 and then again in February, March and April this year.
Clarke, who runs the currency sleeve of the fund, told Citywire earlier this year: ‘We actually managed to buy at cheaper levels than we sold it. The opportunity [to buy back] got big enough so we responded. 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 were not the only ones to spot Trump’s lack of action. ‘There hasn’t been a lot [of volatility] with Trump,’ Singer says. ‘I think investors listen first then wait for something to follow. Often there’s no follow through, so [Trump’s presidency] doesn’t seem to introduce the volatility to the market that it might have.’
Singer (pictured above) has been surprised by how quickly markets have developed an immunity to political risk in the wake of seemingly seismic election results. ‘[The] Brexit [sell-off] didn’t last more than a few months, Trump didn’t last more than a few hours. The S&P was 6% down overnight and then 6% up the next day and that was it,’ he says.
For Singer, though, this is down to more than just good investor insight. ‘Maybe some of the low volatility is unrelated,’ he says. ‘In the midst of all that [geopolitical risk] you have so many other things going on that are dampening volatility.’
He argues that low volatility is more likely due to continued quantitative easing by central banks, the rise of rules-based index investing and the global search for income forcing investors into new instruments.
‘Central banks are still going with quantitative easing. Even if the US is slowing down the growth of the balance sheet, nobody’s really contracting it at any speed or manipulating interest rates or asset prices. Basically, they are monitoring asset prices and having a strategy – mostly verbal – of trying to soften the impact on capital markets,’ he says.
‘We also have a huge industry now that has grown over the course of the last 10 years, where investors have their portfolios automatically invested back to strategy. And what that means is, if something rises more than 2% above where they want it to be from a strategy perspective, all these programs come in and start selling it back down to strategy, and that acts as a dampening force.’
Finally, he argues that nobody is getting income, with the search for yield driving investors to buy and sell volatility. ‘I never would have thought in my wildest dreams I would see plain vanilla defined benefit plans or endowments going into these option strategies to sell volatility to gain income,’ he says. ‘It’s not something that is typically in their wheelhouse.’
The William Blair Macro Allocation fund is a pure macro strategy that invests in no individual stocks or bonds, with the exception of some sovereigns. Instead, it buys indices of a particular market or sector, as well as currencies, and is currently invested in around 30 markets and 25 currencies. As a liquid alternative strategy, it can take both short and long positions.
Since its inception in November 2011 as a 40 Act mutual fund, the $1.5 billion strategy is well ahead of the average portfolio in the Citywire Global Macro category. The last quarter of 2016 was significant for Singer and Clarke not because of their clever moves around the election, but because it marked the start of a shift to re-risk their portfolio.
‘We are now at a level of market exposure that we would say is about average,’ Singer says. ‘We are not defensive or aggressive. We are pretty much taking a position that is neutral in terms of our overall beta.
‘We have also begun to slowly increase currency risk. We started that much later. That has been going on for the past three or four months and we haven’t brought it up quite as much.’
The long and the short of it
This strategy has broadly seen the pair go long in developing markets and short in their developed counterparts. ‘Attractive markets are those that are the most uncertain,’ Singer says.
They are avoiding safe havens such as Germany and Japan, but they are ‘cautiously exposed’ to the US. While they believe it to be overvalued, Singer says the momentum may last longer than many think, thanks to the same factors that are keeping volatility low.
He likes parts of Europe, with long positions on the UK, Italy and Spain, as well as emerging markets such as China, India, Russia, Argentina, Malaysia and Vietnam. On a sector level Singer is short information technology, largely US, and long European financials and global energy.
In terms of the managers' currency calls, perhaps the most eye-catching is a short position on the US dollar. ‘We often have unique positions on currency because most investors are pretty momentum-oriented and we are pretty fundamental in our involvement,’ Singer says.
‘We tend to be short a number of the developed world currencies and long a number of developing currencies and we are short the US dollar right now.’
It is not lost on Singer that the emerging markets he prefers today are shifting away from populism while the developed world runs toward it. He has been watching this trend for some time.
‘In countries like Brazil and Argentina social institutions are improving – things like rule of law, property rights and labor flexibility. But in the developed world those institutions are deteriorating. What that means for us is that fundamental value goes up where there is a move to strengthening these institutions, so we’ve leaned toward emerging markets relative to developed for a number of years now.’