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UBS to increase liquidity in TAA fund over ‘end of cycle’ expectations

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UBS Global Asset Management is shifting the structure of its tactical asset allocation strategy to account for upcoming downside risk.

Speaking with IPE, the manager’s head of asset allocation and currency, Andreas Koester, said the firm believed current growth in the market would cyclically begin to wane in approximately 18 months.

“Markets have two phases – greed and fear,” he said. “We are currently in greed but moving towards the end of that cycle.”

The motivation behind UBS’s view is the expected downturn in valuations within the next two years, which, Koester said, will see liquidity play a key role.

The current economic recovery could go on for another three years given its sluggishness so far, and equity markets generally “roll over” around 18 months prior.

Among the structural changes to the UBS strategy, the move towards providing clients with greater liquidity is key.

Of the four risk/return factors used within its tactical asset allocation strategy – equity, term, credit and illiquidity – the manager will shift away from the latter two in favour of the former.

Koester said the idea was to keep a pro-risk stance, given market valuations can go further from current levels.

However, the manager had invested in the last three years without a safety net.

“Given where we are in the cycle, it is worth putting a safety net in,” he said.

“People are becoming a little complacent, particularly in credit markets and in high yield, where there remains the risk investors think it is a liquid market in volatile moments, and liquidity is currently mispriced in the market.”

While accepting the manager was acting prematurely, Koester said clients were understanding the risks posed by any future downturn, and willing to accept any minor impact on returns in the short term.

UBS said it would increase liquidity within its tactical asset allocation fund to ensure it had the right derivative exposure in place, to limit downsize risk, and boost client assets when the eventual run on illiquid assets came.

“You can make a lot of money for your clients if you provide liquidity,” Koester said.

“In a normal cycle, we are now halfway through the greed phase, so, as a cautious fiduciary, it is time to account for that.”

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