Executive Summary

Portfolio diversification is being tested as correlations across asset classes have increased, particularly during periods of market stress. Recent episodes have shown equities and bonds declining simultaneously, challenging the effectiveness of traditional 60/40 portfolio construction. In this context, Steve Brann, Founding Partner and CIO of Apollo Multi Asset Management, highlights the implications for portfolio construction in an environment characterised by higher interest rates, persistent inflation and elevated geopolitical risk.

Diversification, in this setting, is less about asset allocation alone and increasingly about combining differentiated, uncorrelated return streams. Multi-asset and absolute return strategies, with the flexibility to adjust exposures dynamically and implement both long and short positions, are designed to navigate such conditions. While periods of modest drawdowns remain part of the process, the emphasis is on capital preservation and consistent compounding. As correlations remain elevated, these approaches offer investors additional tools to manage risk and broaden sources of return beyond traditional equity and fixed income allocations.

Transcript

Thomas Schalow: Hello everybody, and welcome back. Today I’m joined by Steve Brann, Founding Partner and CIO of Apollo Multi Asset Management. Apollo is a specialist in absolute return investing.

Today we’ll be discussing the Apollo Diversified Multi Strategy Fund, a UCITS fund, and the broader case for absolute return and multi-asset investing in today’s market environment.

This is a particularly interesting moment, as investors are once again having to think carefully about drawdowns, diversification, inflation protection, and the role of bonds in portfolios. At the same time, rising correlations across asset classes and ongoing geopolitical uncertainty are making traditional portfolio construction more challenging.

A warm welcome, Steve.

Steve Brann: Good afternoon, Thomas. Thanks for having me.

Thomas Schalow: Let’s start with the immediate picture. How was March from a portfolio manager’s perspective, and how have you experienced the recent months in the Apollo Diversified Multi Strategy Fund?

Steve Brann: So, as you know, the backdrop to March has been a difficult environment, with the war in Iran and also a lot of chatter around private credit. So we had a mild drawdown in March, but that is totally as you would expect in these kinds of environments.

We’ve seen this over the last eight years or so, that when you get crisis points and pivot points, there can be a very small initial drawdown. Typically between 1 to 1.5%. We saw it last year in Liberation Day, for example — the fund was down about 1.2%, and by the end of April it was back in positive territory again.

During COVID, we had a mild drawdown as well — around 2.4% in March 2020 — and then the fund started recovering thereafter.

When you have these crisis points, market makers widen their spreads. Part of the initial loss is just a dislocation taking place in the market. We’re already starting to see some recovery in the latter half of March.

The problem with this particular crisis is that fund managers are finding it quite difficult to choose the next direction because we’re getting lots of mixed signals, different truth social tweets from Donald Trump, which are difficult to read.

The expectation was that we would see a mild drawdown, which we did. And we’re very confident that once the picture is clear, the different fund managers that we’re investing in will be able to take advantage of these dislocations.

Thomas Schalow: How would you characterize the current market phase and the related drawdowns? Is this a normal phase in a volatile market or a sign that the opportunity set and the risk backdrop are becoming more complicated?

Steve Brann: This particular event around Iran has been more dangerous than many of the situations we’ve seen in previous years. The escalation level is quite frightening.

Previously we had the 12-day war, we’ve had various different bouts in the Middle East over time, and obviously the Ukraine and Russia war. Typically, the market has been right to take advantage of those dips.

What we’re seeing over the last couple of years is correlations across asset classes at the same time. We saw both equities and bonds fall in March, so a typical 60/40 portfolio hasn’t been able to defend.

This has been a particularly difficult situation to read, mainly because Trump is incredibly difficult to read. It has got the potential that if things escalate and oil prices move to 140 or 150 for a period of time, we could be looking at a global recession. So this isn’t just the norm — we are teetering on the edge of several major risks here.

Thomas Schalow: One of the defining features of the current environment has been the rise in correlations across asset classes. How important is that shift and what does it mean for portfolio construction?

Steve Brann: This is something we’ve been highlighting for some time. What has changed in the interest rate environment over the last three years, as rates have moved up, is that we are starting to see correlation between asset classes, mainly between equities and bonds.

Most people’s careers have been defined by inverse correlation. If you started your career in the early 2000s and into the post-GFC period, you’ve been in a sweet spot for that inverse correlation.

I’ve been around long enough — my career started in the 80s — and through the 90s we had interest rates of around 5% and correlation between equities and bonds. So I’ve seen this play out before.

What’s been interesting in this crisis is that other asset classes that you might expect to defend on the downside have not worked either. Gold and silver have also come off significantly. There haven’t been many asset classes to run to because we’ve ended up with high levels of correlation, particularly on the downside.

Thomas Schalow: If we look at the fund itself, which parts of the portfolio are doing the most work in the current environment?

Steve Brann: You have to be patient and be faithful to your managers in these difficult times. They have the ability to change their portfolios very quickly and take advantage of these dislocations.

At the moment, you have to be patient because it’s not clear whether the war will de-escalate or escalate. Many of the managers are not taking big bets because you could get that wrong. One day Trump says something, the next day it changes. So, they have to be very careful.

Within the different buckets we’re investing in, there’s not been a significant benefit from one bucket to another. What we find is that within each bucket — macro, long/short, market neutral, event driven, credit and rates — it’s the diversity of managers that protects us. We typically have four of five managers in each bucket.

We might have two managers up for the month and two down, and that’s part of the process: building uncorrelated managers together so we’re not exposed to one direction of the market.

Thomas Schalow: Looking ahead, inflation protection feels like a crucial issue again. How do you build inflation resilience into a portfolio like yours without sacrificing flexibility or recovery potential?

Steve Brann: It comes from having a portfolio that is very diverse. One thing across the multi asset portfolios and some of the positions that the managers have been taking is that by having some level of hedge against inflation and exposure to oil and gas companies, these type of areas can create a hedge against inflation. Within the bond and rate portfolios, we’ve got a number of managers who are able to purchase inflation protected bonds to be able to take advantage of that.

From a fund point of view, we like to see that it’s much better in terms of performance when there’s a higher level of interest rate and a higher level of inflation. JP Morgan coined it the alpha winter. So between about 2009 to 2018, we had low interest rates, low inflation and low realized volatility.

All of those things in the last five years have changed, which means that the outlook for absolute return and hedge fund investing has got better because you’ve got a higher cash on the balance sheet of the fund of what’s not zero anymore, 2, 3, 4% cash on the balance sheet. We’ve had higher realized volatility which they can take advantage of, which helps you against that whole kind of inflation protection area.

Thomas Schalow: How are you thinking about bonds and credit at the moment? Do you still see traditional fixed income as a dependable diversifier or do you think investors need to be more selective given the combination of inflation risk, spread risk and slower growth?

Steve Brann: There are two concerns in the bond market. First, government debt levels are very high across the Western world. And they are pushing the boundaries of what is acceptable in terms of the budget deficits that they’re running and how much debt they can actually sustain. So there’s a risk, and we saw it in the UK bond market a couple of years ago with the list trust budget, and we had a bond puke.

But we’re not getting too far away from the US having a sort of similar situation, maybe two or three years away from that if debt keeps rising. But we’ve got issues in Japan, we’ve got issues in Europe.

And then there’s the other side of the coin in terms of the bond market – spreads are incredibly low, whether that’s investment grade or high yield.

We haven’t really seen a credit or the end of a credit cycle for around about 17 years now. So most investors haven’t really seen a default cycle.

Added to that, we have started to see the unraveling of the private credit market. And private credit has become, it’s not necessarily a systemic risk to the banking system because the banks, with all their kind of legislation that came on after the GFC, we moved a lot of that sort of private lending into private credit vehicles.

But there has been an incestuous relationship between private equity and private credit and mainly in the software space. They leveraged up when loans were particularly cheap, and now they’re looking to refinance those at higher levels. And they’re all now having private credit businesses that are sort of interloaning across each other. So private credit has come under pressure.

Thomas Schalow: Coming back to the elephant in the room, the Middle east crisis, how do you think about that kind of geopolitical stress in the portfolio and what are the main short and medium term risk it creates for multi asset and absolute return investors?

Steve Brann: Yes, it really is the elephant in the room. Geopolitical risk has been rising for a number of years, and I really hope that this recent de-escalation is going to be successful. We really don’t want to be stepping into a situation where we’re thinking about the potential for a third world war type scenario.

And the longer that this lasts, the longer the damage takes place in terms of inflation and oil prices. There are parts of the refinery industry in Amman and Qatar that have been destroyed that can take two to five years to rebuild those facilities. If things escalate and we have more facilities, maybe pipelines, refineries that are bombed the longer the inflation pressure becomes. So we are in a pretty serious situation.

But that is the beauty of being able to have absolute return because you can go long and short. So you can take advantages of parts of the market that are going to be difficult by shorting those parts of the market and maybe going long defensive companies. But equally these guys are not benchmarks.

So if it becomes apparent that the war’s over, they can flip their portfolios to become more aggressive and take advantage of the dislocation or if it gets worse, they can create more short positions to protect their investors.

It’s an ideal kind of market really for multi asset and absolute return investing. This is what these vehicles were designed for, to deal with volatility. And they are the truest sense of alpha because you’re going to get it both sides, you can get it upside alpha and downside alpha. It takes a little while, as I say, for the fund managers to fully see what the next environment’s going to be. But once that becomes clear, they’re there to take advantage of that.

Thomas Schalow: Finally, how would you describe the role of the Apollo Diversified Multi Strategy Fund in a broader portfolio?

Steve Brann: The portfolio is designed to help people sleep at night. It’s about compounding returns over the long run and preserving capital. It’s not a “shoot the lights out” type of fund. It will take advantage of dislocations, but it’s designed to be more stable.

It helps investors diversify away from other asset classes that may have a difficult time, particularly when correlations are higher. But it’s also to give you that comfort that you can compound returns in a difficult market. 

Thomas Schalow: To sum it up, what is clear from this discussion is that the challenge for investors today is no longer just how to balance equities and bonds, but how to build portfolios that can cope with inflation risks, higher correlations and a much less predictable macro backdrop. That is exactly why the debate around absolute return and flexible multi-asset investing has become so relevant again.

Steve, thank you very much for your time.

Steve Brann:
Thank you, Thomas. Nice to see you again.

This transcript was generated using AI and has been reviewed for accuracy.