Currency funds suffered from the low volatility that
defined 2012, but FX Concepts? new Chief Strategist Bob Savage is cautiously
optimistic that 2013?s start can be sustained as hot spots around the globe
promise to keep things interesting. P&L?s Julie Ros sat down with Savage
for a macro view of the markets, and a micro view of FX Concepts.
JulieRos:HowisTrack.combeingintegratedintoFXConcepts?
RobertSavage:It’sawhollyownedsubsidiary;it’sstilla standaloneproduct.We’retakingwhatwe’velearnedandare applyingittoFXConcepts’sownproduct.Wearetryingtosee whattechnologyandideascanhelpthemandviceversa.That’s thefirstmove.Thesecondmoveisfromapersonnellevel.I’ve takenonalargerroleatFXConceptsastheirchiefstrategist.
Theroleofachiefstrategistatafundisnotaboutrunning models,it’saboutreallyguidingthebusinessforward.Sothat’s ultimatelymyvision,and[FXConcept’sCEOandfounder]John Taylor’svision,whicharebeingmeldedtogethertocreatea visionofwhatFXConceptsisgoingtolooklikeoverthenext fiveto10yearsandwhatthegameplanisforustogetthere.I wanttogrowFXConceptsto$10billionundermanagementin FXandotherassetsclasses–someinfixedincome,somein indicesandequitiesandsomeincommodities.Sowhenpeople thinkaboutFXConcepts,it’snotjustanorganisationthatlooks throughtheFXlens,butthatlensisausefuloneforlookingat theworldofavailable,tradable,liquidproducts.Ifwe’velearned anythinginthelastfiveyearsit’sthatbymebeingpigeonholed
intoFXonlyandwhenFXhas4%actualisedvol,yourreturns aregoingtobedisappointing,soyou’vegottohavesomethingin placetosustainthat.
JR:Anynewproductsinthepipeline?
RS:We’vehadanewproductoverlastsixmonthscalledPure BetaPlus,whichiseffectivelyariskparitytradethathas, unlikeourcompetitors,averysubstantialFXcomponent.So wehavebonds,FX,commoditiesandbroadindices,butwe’re onlytradingliquid,positivecarryvolweightedcomponents– so25%goesintocommodities,25%oftheriskgoesintoeach oftheseareas.Thatmeansyoumightactuallyhaveaverysmall amountofcommoditiesindollartermsbecausethey’remore volatile.Italsomightmeanthatyouactuallyhavealarger percentageofbonds,becausethey’relessvolatile,butovertime thatwillchange,andweharvestthevolatilityofthemarketonadailybasis.Soasthingsmoveupanddown,wearere- weightingaccordingly. Itstartedlastyearandwasonarunway for19%return,whichgetspeopleexcited,butIthinkitshows thatyoucantakeanFXlensandreallygetabroaderperspectiveonothermarkets.That’swhatFXConceptsisall about.Notthatwe’regoingtoloseourcentralmissionor centralideaofour31-yearhistoryoftradingFX,we’regoing tobethebestthatwecaninthosemodels.Buteverybody knowsthem–trend,carry,meanreversion,vol,wedothemall andwereinthetopthreepercentileinDBSelectlastyearand madea1%return.That’sjustnotgoingtobeexcitingtoall investors,althoughsomearegoingtoseethroughthatandsay ‘Theseguysareexpertsinthisandwereup1%whenthe averagefundwasdown4-5%.’
JR:SinceyoujoinedFXConcepts,whathasbeenthe majorchange?
RS:Havingdonethisbefore,you’vegottolearnaboutwhatyou havefirst,sotherehaven’tbeenanymajorchanges.I’mnotabig advocateofrushingintochangeaculturethatIrespectand
knowhasbeenaroundalongtime.Ihavebeenspendingthelast fewmonthsreallylearningwhatthestrengthsoftheorganisation
areandhowtogetthemostoutofit.OnethingI’mdoingistryingtotakethelessonsthatwe’ve learnedoverlastthreeyearsaboutriskmanagementandhelp optimisethatandmakeitmuchmorealgorithmic,andcomeup withawayoftyingmoreeconometricfundamentalideasinto theirprocess.That’swhatJohnhasalwaysdone.He’savery thoughtful,cyclicallyattunedleaderandI’mtryingtotakemy fundamentalunderstandingofhowthemarketsworkandapply thattomodelsandhelpthemthinkthroughwhichsetofmodels mayperformbetteroverothersincertaincircumstances.That’s notsoeasytodo.
JR:Andithasn’tbeenaneasytimeinthemarketseither… RS:Forallfunds,thishasbeenadifficultthreeyearssowe’re tryingtolivewithinourmeansandmaketherightlong-term
investmentsforgrowth,andintheshortterm,keepthingsas tightaspossible.
JR:Whatarethemostinterestingeventsonthehorizon thisyear?
RS:ThefocushasshiftedfromEuropeanbreakups,totheUS debtdowngrade,toJapanandtheyendebasement,andthen there’stheinsipientglobalstallspeedgrowthproblem,which begsthequestionofwhatisthecorrectbalanceofgovernment andprivatesectorinvolvementinalmosteveryaspectofthe economy?WhenyoulookatplaceslikeEurope,therearedoubts aroundwhetherMerkelisreallygoingtohavenoproblem gettingre-elected;isItalyreallygoingtohaveaclearcutmajorityinleadingitandsustainingitsfiscalausteritymeasures;isSpaingoingtobeabletogrowastargetedenoughtomeetitsfiscalneeds?TheanswerstothosequestionsbringyoubacktoEuropeasarisk.Butthistime,unlikethepasttwoyearswheneverybodysaidGreeceandSpainjusthavetoleavetheeuro,we’renowinasituationinwhichGermanyisnolongerabletoholdupthewholeenterprise.SotheeuroactuallybecomesamuchmoreimportanttoolfordrivingflowsinandoutofEurope.There’sbeenatremendousamountofbottompickingforEuropeanequities,andIthinkthere’sbeenalargescale reinvestmentintosomeoftheperipherybondmarkets.Assoon asthatplaysoutandwegetgrowthdoubtsagain,youcouldsee anotheroutflowofEuropeiftheydisappointonthegrowth recoveryfront. TheargumentsI’veseenforEuropere-growingrestreallyonthe USandChina.Thebiggestargumentyouhearforgrowth
comingbackinEuropehasbeenthatithasbeensobadthatit hasgottogetbetter,butIdon’tfindthatpersuasive.Ialsothink thatthewaytheperipheryofEuropehandlesthis,howthe outsiders–theUKandhowittriestorenegotiatetermswiththe EU,theSwedes,Norwegians,SwitzerlandandhowPolandand HungaryandsatellitestatesliketheUkraine–areallgoingto interrelate.What’stheroleofSerbiatoEuropeandhowisit goingtobepartofthisunionisaquestionthatbecomesmore complicated.WhileitwasoncegoingtobethatallofEurope wouldbetradingeurosonedayasonebighappymarket,it’sno longerthatwayandattheheartofityou’vestillnotdealtwith thebankingcrisis.Fromaneconomicsperspective,Ilookat Europeandthink,youhaveacreditcrisis,youhavenotresolved it,there’sabankingcrisisbehindthisandthere’snoshadow bankingwayaroundit. Chinahasashadowbankingsystemthathasallowedittogrow at7.5%–Idon’tthinkit’ssustainableandthinkthebiggest riskforChinarevolvesaroundthatshadowbankingsystem lookingstrangelylikeoursdidin2007.Whenbanksarefullup, theshadowbankingsystemtakesthecreditjobintowandthen itblowsupandyou’releftwithapileofbadloans.Europehas neverdealtwiththosebadloansandthedayofreckoningfor banksisstilltocome–theeurogrouphasyettocomeupwith apan-Europeansolutionthat’sbelievabletoinvestorsandthat istheproblemwithEurope.It’spainfullysadtoseeandit becomeslessandlessimportanttoinvestorsovertime,andit putsmorepressureonplaceslikeLatinAmericaandAfrica. TherealproblemforEuropeisthatitoperatesasaunionof convenienceandwithoutaunifiedTreasury,unifiedbanking systemandaforeignpolicy,you’repronetowhat’sgoingonin NorthAfrica.NorthAfricaasaproblemtoEuropeandtheUSis clearlyontherise.Ifwelearnedanythingaboutwhat’sgoingon inMali,it’sthattheentireregion’sexportstoEuropefornatural gas,energyandoilareatriskandthepoliticalstabilitymany thoughtwouldcomeoutofan ArabSpringrevolutionjustsmacks ofwhathappenedtoRussia.Thatregionbeingdestabilisedisa hugeriskandtheUSpullingoutoftheMiddleEastleaves
Europevulnerable.It’sagreatchanceforChinatocomeinand haveamuchbiggerrolethereandIexpectthattohappen.
SoforEurope,ithastodealwiththefactthattheLong-TermRepoProgramme(LTRO)isgoingtobealittlebitunbalanced. IntheLTRP,bankscanborrowuptothreeyearsfor1%andgive cigarwrappersandvodkabottlesascollateral.It’sclearnowthat theyneed$2trillion,whichwastheirversionofQE–theydidit inaverybankcentricway,whichisdangeroustothebalance sheetofECB,becauseitwasleftholdingcigarwrappersand vodkabottlesascollateral.TherealproblemforEurope
therefore,ishavingalotofbackbookpositioningthathasnot moved.EverybondfundabletogetaccesstoUSpaperinthe distresseddebtareadidso,noneofitcamefromEuropeand that’stheproblem,becausethey’vegottogetridofthat.That’s mybiggestworry.
JR:LookingatAsia,isJapanamajorproblemfortheregion? RS:Japanisaproblemfortradeandforre-nationalisingthe politicsofthatregion.CountrieslikeThailandandthe PhilippinesaregoingtobeforcedtochoosebetweenChinaand Japan,andKoreaisbeingtornapartaswell,sothecurrency destabilisationisjustasymptomofbiggerproblemsofalliances andtheremovalofUSleadership.Basically,theimplicit guaranteethattheUSwasgoingtobethearbiterofallthings tradeandleadershipintheregionhavefallendown;it’snot crediblefortheUStosaytoTaiwanwe’regoingtoprotectyouif Chinaisgoingtoinvade,notthattheywouldbecausethey’ve alreadyeffectivelymadeplansthatTaiwanwillbelikeHong KongandtheTaiwanesearebeginningtobelievethat.
JR:Whataretheimplicationsfortheregionofthatslow encroachment?
RS:ItwillcometoaheadinplaceslikeMyanmar.Thequestion becomes,whoisreallygoingtobenefitfromthoseuntapped resources?What’sreallygoingtohappeninNorthKoreawhenit beginstobecomelikeEasternGermany?Who’sgoingtobeon thewinningsideofthat?
JR:WhatthemesareyoutrackinginLatinAmerica?
RS:Thecurrencywarsisstillatheme,becausethemoneyis flowingintotheregionduetoitsdemographic,economicand exportmixofcommoditiesandothercheapgoods.Sothe Americasareinagreatposition.Thesenationsarealsolargely politicallystable–therehasn’tbeenanyrealpoliticaluproar,and evenifthereisuproar,suchasinVenezuela,it’snotnecessarily baduproar.Thequestioniswhattodowiththisinflowof
money:doyoujustinterveneandbuildupacurrencyfund;do youlowerrates;ordoyouputupBrazilian-likewalls?Allof thesecanleadtounintended,insipient,inflationaryrisk.
JR:DoyouthinkLatinAmericaisontheedgeofan inflationaryspike?
RS:Yes,andwhetherthecentralbanksareuptothetaskof respondingtoitisthebigquestion.Also,whetherthereis enoughinter-regionaltradebetweenBrazilandMexicoas a goalposttogettingoffthedependencyofbeingonthedollaror eurooryenrollercoaster.Thereisalsothequestionofwhethera currencyunioninLatinAmericawouldhelprespondtothe inflowandwhetherthere’saneedforsupra-regionalleadership.
JR:Istheregion’sdependencyoncommoditiesariskin2013? RS: IfweseeChinasimplyneedlessandifwefindthatcertain ofChina’stradingpartnershaveoverbuiltcapacitytodeliver thesecommoditiestoChina,thereisaquestionaboutwhatthat meansfortheregion.Itremainstobeseeniftheregioncan thrivewithBrazilbeinglacklustre.
JR:SoChina’sperformancewillbekey?
RS:Chinatargeted7-7.5%,soeveryone’sexcitedaboutabounce inChinesedemand.But,iftheauthoritiesaretellingyouthey’re happywith7.5%,that’saproblem,becausethatmeansyoucould have7%.CountrieslikeBrazilhavebuiltouttheirexportmachine forironore,oilandfoodforan8-9%Chinesegrowthrate.Ifit’s reallygoingtobe6.5-7%overthenextfiveyears,that’sa problem.Youcouldalsothrowintheotherpart,whichisthat increasingly,peopleareconcernedaboutglobalwarmingand
whatitmeansfortheirexportbase.Isthereariskthatthese weatherconditionswe’reseeingintheregionarepermanentand ifso,whatdoesthatmeanintermsofwhothewinnersandlosers are?Also,dotheyhaveanyrealenvironmentalprogrammes? BrazilclearcuttheAmazonandnow,theabilityforthemto sustaintheiragriculturalpredominanceisactuallylimitedbecause theydon’thaveanysustainablepoliciesinplace.Isthatalesson fortherestoftheregion?Itisparticularlyinplaceslike GuatemalaandHonduras,whichincidentally,iswheremostof ourfoodcomesfrom.
Theseguysarenotnecessarilyfollowing anybettersetsofrulesforsustainableagriculturaloutput.
JR:Tenyearsago,LatinAmericamainlyfacedEurope,but nowitlargelyfacesAsia.IsthereachanceforEuropeto regainitsposition?
RS:TherecouldbeanopportunityforgrowthinLatinandSouth Americainre-facingEurope,buttheregionasawholeisvery mixedonhowitfacesEurope.Forexample,the
Argentina/Repsolfiascorepresentsanationalistmentalitythat canbeanimpedimenttonewcapitalflowsandbelievability.
JR:Igetthesensethatalotoftheworldisgoingnationalistic. WhatisyourviewontheverydividedUSCongress?
RS:Thebeliefinthecommonwealth–asopposedtoprivate wealth–hasbeenlost.Wehavesuchgreatnationaltraditions
andthingsweshouldbeproudof;namely,thatwecanpeaceably
haveanelectionandgiveapersonthereinseveryfouryearsand celebrateasacountrythatdemocracyworks.Butwhat’s
happenedinlast16yearsisthatwearenolongerparticipatingin thethingsthatmakeusgreatasanation.
JR:Whataretheimplications?
RS:Weonlybelieveinthenationwhenthepoliciessuitus.That’s reallyunhealthy,selfishthinkingthatlosesthegreatergood;which goesbacktothecommonwealthideal.Therearethingsthatwe needasacountrythatallofusbenefitfrom–themilitaryis obviouslyoneofthoseandinfrastructuresuchashighways,ports, trains,helpusall.InfrastructureissomethingLatinAmericahas
noproblemthinkingaboutandputtingmoneyinto.Asforthe infrastructureintheUS,weneed$3-4trillionjusttosustainthe roadsandbridges.Anyonewholiveshereseesit.It’sobvious.
JR:Arethereanybrightspots?
RS:TheUSremainsaveryvibrantanddynamiceconomyand despitetheworstpoliticalstalematesanddebtproblems,we’re
growingandwe’recomingoutofit.Whilewemaystillseesome cyclicaldownturns,ourhousingmarketisclearlyinrecovery
mode,ourabilitytogrowisbecomingmorecleartopeopleandI don’treallythinkthepoliticswillgetinthewayoftheFed’s programfromworking.Atworstwemuddlethrough,atbest,we growat3%overthenexttwotothreeyearhorizon,sotheUS
hasgotalotofthingsgoingforit.Nottheleastofwhichis energyindependenceonthehorizonandaclearcuttechnological
edge.We’reveryquickadoptersofnewtechnology,andremain willinganddynamictoconfrontourproblemsanddealwith
themasneeded.
JR:Anythingpositivefortheyearahead?
RS:IfIhadathemefor2013,it’sabouttheregionalisationoftheworldandhowyoucouldinvestonaregionbyregionbasisanddowell.Theregionof2013thatseemsbestpositionedisthe Americas,secondis Asia–dividedintoNorth/South.Wecould seeJapansurpriseusabitifitcomesoutofitsrecessionandthe devaluationoftheyen,whileChinacoulddisappointalittle. Europeremainstheweakestlink,butit’sjustlessimportant.The surprisecouldbethatItaly,Spain,Greece,PortugalandIreland havetakenenoughmedicineandactuallystabiliseandgrow
betterthantherestofEurozone,butthat’sabouta30%chance. WhileEuropeanbanksarepullingbacktheirroles
internationally,there’sroomforUSbankstoreallyhavea resurgence–especiallyin Asia.SoUSbanksaregoingto becomemoreimportant.
JR:GivenyourviewsonLatinAmerica,whatareyourviewson thefutureoftheNDFmarket?
RS:Dodd-FrankreallychangesthewayFXworksforsome instruments.IfNDFsaregoingtoberegulatedandneedtogo tocentralclearing,thatmeanstransparencyaboutwhat volumesarereallygoingthrough.FXisthemostopaque marketaboutvolumeandthemosttransparentaboutprice.As soonasyoumarrythetwo,itbecomesalittlebitmoreequity- likesoalotofbusinessmodelsinFXarestartingtoshiftfrom fixedincome-likeideaswherepricediscoverymatterstoOTC marketstoexchangemodelmarkets,whereaccessisprovided forafee.Ifyouaddupalloftheprimebrokers’business,all thenewagencyFXbrokers,alltheexchanges,aswellasthe algosbeingprovidedbybanks,addinretail,andyou’retalking about45%ofthemarket.
JR:DoyouseetheflowinNDFsincreasing?
RS:Yes,becauseitisbusinessthathastobedone.
JR:SoyouarebullishonEM?
RS:Yes,IthinkgrowthinFXrestswithEM.Ifyoulookatthe revenuestreamsatbanks,halfofthemoneyin2011camefrom EM,and2012lookslikeitcouldbe55%.Volumeswill continuetogoup.There’sgoingtobemargincompression,but somebanksaregoingtospecialisesowe’llseepocketsof
banksdoreallywellinKoreaandBrazil,andothersinsay, Indonesianrupiah.
JR:Whataboutoptions?
RS:Optionsareabitmoreofaproblem.Optionsusers traditionallyhavebeencorporatesandhedgefunds,thenabit ofthesovereignwealthcrowd.Buttheideathatacorporate needstouseanobjectthat’sexpensiveasopposedtousinga forwardthatisprobablyunregulatedinalotofcurrenciesis goingtobeaproblem,orafuture.Theneedforoptionsinthe FXmarketisnotgrowing,it’sstable.Optionsdeskscouldbe replacedbystructureddesks,whereyoupayforthestructure. Theoptionsmarketmaybecomemoreadeptatbeingonthe futuresmarket.You’renotgoingtohaveanexactmatch,but
enoughliquiditywillbetherethatyoufeellikeyou’recovered. That’sahugeshift.Reinventioniskey–innovationand adaptingtothenewworld.
JR:Whatabouttheelectronificationofthismarket?
RS:Ithinkthishasyettobeseentoitsfullextent.Itwillbe twoorthreeyearsbeforeyougetthekindoftransparency thatyouwouldexpectfromtheEBS-likemodel.Currently, therearescreensthatshowyouwherepriceis,butyoudon’t knowwhereittraded.Soon,it’sgoingtobecompletely clean.
JR:WhataboutG10?
RS:Intermsofspot,we’reatabsolutezeroofspreads.The surpriseforFXisthat,inthepictureIpaintedofallthese problems,nonearethatmaterialandweprobablygrowat3-4% peryearforthenextfiveyears.ButifFXgrowsat10-15%per year,nobodyhasthecapacityinplacetohandlean$8
trillion/daymarket.That’stherealrisk.Worldtrade,whichdrives
allassetflows,justneedstogoupandFXwillfollow.The electronificationoffixedincomebringsmorevolume,which begetsmorevolumeforFX.
Thatsaid,we’reinforverytumultuoustimes.There’sbeena 30%cyclicalbullruninbonds–fromtheglorydaysof RonaldReaganin1981at18%–downto1.4%lastsummer. What’sthenextmove?WhathappenstoFXinthemidstof thatisasignificantopportunityoverthenextfiveyearsasthe marketforbondsbottomsout.Fiveyearsfromnow,we’re goingup,andthat’svolatilityintoFX,soI’mveryoptimistic aboutbeinginthisbusinessoverthelongerhaul.Rightnow, notsofun,butsobeit.
