VSP CIO on Bloomberg: Volatility as An Asset Class to Manage Risk in Extraordinary Time

Vanessa Xu, Executive Chairman and CIO of VS Partners on Bloomberg Markets: Asia on April 5.

Click the link at the end to watch the video.

On complexity of the risks facing investors: in a highly complex macro environment, trying to predict the direction of assets and markets is extremely difficult.

⚫ The peace dividend, which is the biggest the dividend over the last few decades, on top of which we built a predictable world order, trade order, currency regime and supply chain, is shaken by Russian-Ukraine war. 

⚫ Security becomes a priority on nation’s mind than economic productivity. As such, disruption in supply-chains will lead to a regionalization and localization trend, which produce inflationary pressures on resources, commodities, energy and upstream products.

⚫ Think in the big picture of a long debt cycle and long easing cycle unwind. It is just the beginning, and the pressure on long duration growthy assets will continue.

⚫ As a result of many risk factors moving to different directions, one certainty is that volatility will continue to be heightened. We see different types of strategies in different asset classes get whipsawed.

On how to position a portfolio to manage or even benefit from these risks

⚫ We treat dispersion and volatility as a third asset class in addition to the traditional bond and equities. We introduce it as a structurally un-correlated diversifier, which benefit the portfolio   solely from volatility, instead of making any directional bets in conventional asset classes. In Asia, it is forefront because the underlying instruments don’t exist but in developed markets, they are available.

⚫ Other ways to diversify portfolio risk is to invest in asset classes and regions or countries that benefit from this supply chain onshoring trend. In terms of equities, on one side of the barbell, is to have value tilt, quality tilt, and a yield tilt too. In an inflationary environment, which is a midterm lookout in the next two to three years, balance-sheet-strong companies with physical assets, cash-flow-steady, are strong yield assets; on the other side, some quality growth names in the tech space that has network effect and sufficient cash flow to grow out of this liquidity tightening cycle. Some have already corrected 50-60%, and it might be time to begin looking at them.

Link to the video：

https://www.bloomberg.com/news/videos/2022-04-05/vs-partners-vanessa-xu-on-global-investment-strategy-video