Fixed Income Strategies: Positioning during the New Wave

We maintain a relatively high modified duration close to 3. The Fund’s average rating is BBB and average YTM is 1.14%. The portfolio has a tilt toward Credit and a short-dated exposure to non-core sovereign debt.


Sovereign component (24% of the fund's total assets)

• Our exposure to sovereign debt is mainly composed of non-core European debt offering significant credit spreads at a time of negative interest rates (i.e., Italy, Greece, Portugal & Cyprus) and in anticipation of renewed ECB support.
• We actively manage our exposure to Italian sovereign debt that account for the bulk of our government bond portfolio in a volatile market environment.
• Stability at markedly negative yields and central bank’s dovishness encourage us to have limited exposure in the core segment.
  
  

Corporate component (63%)

• Although we have reduced our exposure to Credit starting in August by selling the longest maturities in our portfolio, as well as on issues with small positive yield that didn’t enjoy direct ECB support, Credit remain our main conviction with more than half of the fund’s total assets.
• We keep our exposure to highly rated and short maturity investment-grade corporate credit in order to take minimal risk.
• We maintain our conviction on specific situations in sectors impacted by the crisis (Leisure, Airlines, Auto…) we believe in market leaders with healthy business models, strong balance sheets and access to liquidity guaranteed by their ability to pledge their assets (even if the health crisis lasts another 12 to 18 months).
• By reducing portfolio risk while holding onto several strong convictions, we should have the agility required to navigate upcoming events (US presidential election, Brexit and a possible vaccine) which all have the potential to make financial asset prices more volatile.
  
  

Cash component (13%)

• We keep a large allocation to cash items at c.13% (cash account, T-bills and money market funds). In addition, we have c.8% of our bonds maturing or likely called within the next 12 months.

Our main convictions:

• Still a strong exposure to the credit market with now 54%:

Mainly through exposure to the HY segment (15%) and financial subordinates (12%). We have just reinforced our exposure to HY credit after:

• The ECB's very accommodating speech in October which should deliver in December.
• Lockdowns in Europe which do not seem to be paralysing economies as in the first wave in spring 2020.
• A spread widening since mid-October which offered good entry points.

We also maintain our Covid-names convictions (both IG and HY ratings) which still offer an attractive carry and potential for appreciation in the medium term.

• We keep our strong exposure to Italian sovereign debt (should largely benefit from ECB support/ No more short-term political risk/ Attractive carry level).

• Positive duration on core countries (mainly on the EUR and US yield curves but also, more modestly, on AUD and GBP yield curves) to take advantage of monetary support around the world and protect the portfolio in the case of macroeconomic deterioration resulting in flight to quality movements.

• Optional strategies on the US yield curve to flexibly adjust our interest rate risk exposure.

High modified duration at 6.5 and a net exposure to the Fixed Income markets at 86%.

• Despite a solid performance year-to-date, the opportunity set is still attractive.
• Credit markets have come back close to the levels where they were trading at the beginning of 2019. Yet these valuations hide an extreme level of segmentation between what is perceived as safe (which is bid at all cost by participants constrained to invest in credit to find some income) and situations that are more complex, cyclical or affected to some degree by the Covid19 crisis which trade at very wide levels.
• This segmentation has been a recurring feature in credit markets for the past years, but this trend has been exacerbated by the ongoing situation. This is an attractive environment for bond pickers.
• Although we have slightly decreased the Fund’s exposure in the last few weeks to lock some profits, we are staying well invested with a high net High Yield exposure as attractive opportunities remain plentiful.
• We focus on specific situations in sectors impacted by the crisis (Leisure, Airlines, Auto…) we believe in market leaders with healthy business models, strong balance sheets and access to liquidity guaranteed by their ability to pledge their assets (even if the health crisis lasts another 12 to 18 months).
• We maintain a high exposure to CLOs, which offers an attractive risk/return profile.
• These opportunities today allow us to build a highly diversified portfolio offering an attractive excess spread, i.e. the difference between the spreads of bonds in the Fund and our estimation of these instruments’ costs of risk, which is much larger than it has been in the years preceding the Covid-19 crisis.

Higher overall modified duration which stands close to 8.3 and limited currency risk. The Fund’s average YTM stands at 3.35% now with a BBB+ average rating ¹ .

• Currency component: Cautious positioning favoring the Euro and a light short exposure to the USD, as the US Covid-19 wave in the Midwest and the uncertainties could generate some volatility on the greenback. We are also maintaining a net short position on the CAD due to weak macroeconomic fundamentals and the lack of carry while we are maintaining a long position on both the CNH & AUD as both currencies are linked to Chinese growth. Fund’s main FX exposure: EUR 103% / USD -10% / AUD 8% / CAD -8% / IDR 5% / CNH 3% / Others -1%.
  
  

• Rates component:

o Reinforced long duration strategy with a diversified exposure to core rates between the US & Australia. o Decent allocation to EM external debt (Russia, Romania, Morocco) and Chinese local rates.

• Credit component: Long IG and more modestly HY. Physical allocation to some idiosyncratic names where we are well paid for the fundamental cost of risk on both primary and secondary markets. Tactical higher credit markets beta thanks to a short position on Xover CDS index (short indices CDS = long credit risk).