Just like an active fund manager has to balance the different risks in his portfolio as the markets move, a fund of funds has to decide which strategies have the most promise and manage exposures accordingly. In a recent interview with Bloomberg Briefs, Permal Group CEO Omar Kodmani explains why the fund of funds (with $22.5 billion in assets under management) has shifted from under- to overweight global macro and why he thinks activist strategies are well-positioned right now.
Permal overweight macro as central banks moving in different directions
“In the middle of 2014 we turned bullish on macro because we took the view that the long-awaited divergence between the major economic regions of the world was finally beginning,” says Kodmani.
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He says that by that point it was already clear that both the Federal Reserve and the Bank of England were going to start tapering their QE programs, while the ECB and the Bank of Japan would do the opposite, creating more room for currency traders to work in. That dynamic, along with emerging market trading opportunities, has convinced Kodmani to change Permal Group’s macro fund exposure from 15% underweight to nearly as much overweight now.
As European banks are forced to continue de-risking, Kodmani is also interested in increasing his exposure to European credit, but he wants to find managers who are able to sort through all the paper coming onto the market since he expects gains from the beta trade has played itself out.
Kodmani bullish on long-short equity, event-driven funds
Kodmani says that he is also bullish “on activism, which straddles long-short equity and event-driven. It has been the best performer in 2014 for us and the industry.”
He likes technology, biotech, and energy because all three industries change rapidly so that a skilled manager has opportunities to get ahead of the market. He’s not concerned that changing US tax laws will significantly reduce the amount of M&A next year because even without the tax benefits that come from tax inversions there is still a lot of cash laying around and cheap financing available.
In both cases, Kodmani’s decision to be overweight global macro and activism, he is essentially saying that the easy gains from market beta are finished and that active investors are going to have to start generating more alpha to earn their keep.