A €20bn fund bets sterling will rise

Nordea Bank’s Stable Return fund, Europe’s fastest growing asset manager, is betting sterling is now on its way up.

It’s a shift of strategy from earlier this year, when the €20bn fund bet against sterling using the yen. 

It profited from that wager, with the pound losing 28% this year against the Japanese currency as Britain voted to leave the EU.

“The valuation has been priced out to become more fair,” Asbjoern Trolle Hansen, head of multi assets at Nordea Asset Management, said in an interview from Copenhagen.

“We’ve started to short commodity currencies instead that are looking a bit pricey,” using sterling to bet against the Australian and New Zealand dollars, he said.

Such bets are characteristic of the fund, which tries to generate returns by exclusively focusing on risk and eschewing benchmarks.

Counterintuitively, the stability the fund offers lies in increasing complexity across several asset classes.

It’s had an annualised return of 7% in the past five years, with a 4.1% volatility in the past year.

“Why is complexity increasing? It’s because historically, you’ve been able to use just equities and government bonds to construct a risk-balanced portfolio,” Mr Trolle Hansen said.

“But with interest rates at these levels, that doesn’t fly anymore,” he said.

The 46-year-old’s team of 40 people uses bottom-up analysis to see where the risk premium is best, largely ignoring the economic outlook.

It’s now in a roughly 50-50 allocation between equity and fixed income, even though this year it cut duration in its bond portfolio to about six months from two and a half years at the beginning of 2016.

That means it’s essentially almost holding cash, positioning itself for rising rates.

“Particularly after Brexit we’ve been decreasing the duration in the portfolio significantly because there’s no value left in UK bonds,” he said. 

“And also US bonds have been cut, as they offer less and less value.”

The fund has completely turned its back on corporate credit, but holds about 25% in covered bonds, and is gravitating toward emerging market stocks.

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