With nowhere to go, this $64 billion asset manager bets on VIX

By Jonas Cho Walsgard

With massive stimulus inflating stocks and bonds, the tactical allocation team at Norway's largest bank has opened a bet on volatility for the first time.
The unit at DNB ASA is hedging its mixed funds by keeping duration short and buying volatility index contracts for the first time, according to Torkild Varran, chief executive officer of DNB Asset Management, who oversees about 530 billion kroner ($64 billion).

With the global hunt for yield getting increasingly difficult as stock market valuations rise, investors are trying to protect their returns while limiting how much risk they take on.That has led the DNB team to go underweight stocks and global bonds, buy CBOE VIX October contracts and boost cash holdings.

“It's vulnerable,“ Varran said in an interview at his office in Oslo.“We see much more that can drag the market down than we see positive surprises. We can't see where they could come from.“

The team holds 0.8 percent of its DNB Aktiv 80 fund in VIX index fu tures maturing in October 2016 as well as about 8 percent in cash.

Varran's team is especially negative to U.S. utility, consumer staple and telecom stocks, sources of dividends that have gained as investors searched for steady cash flows.

“If you look at some companies, there are many that have borrowed to pay dividends,“ he said. “How long can you continue to do that? If you're priced as a dividend stock and then begin to lower your dividend policy , then the effect on the stock price will be rather big.“

The team's funds prefer energy and technology stocks and view emerging markets as the cheapest region for equities, while they are betting against the U.S. and Japan, according to Torje Gundersen, a portfolio manager in the asset allocation team. “Emerging markets have taken a beating,“ he said. “ A lot of investors were overweight emerging markets for many years but they sold off gradually as the markets fell. Then you have a pretty good mix -unpopular, fallen a lot, looks cheap. And the commodity prices that pulled them down have flattened out.“

With valuations stretched and earnings momentum weakening it's becoming harder to find reasonable investments compared with a couple of years ago.

“It's not yet like 1999 as far as valuation goes, but there are indications of a bubble,“ Gundersen said. “Now we've emptied the six shooter in all areas -the rate is zero, a lot of QE, pricing is up and growth is the same -it's more challenging now.“