Fixed Income strategies: weekly positioning through market turbulences

We maintain a relatively high modified duration. The Fund’s average rating is A- and average YTM (Yield to maturity) is 1,6%.

Sovereign component

• Core sovereign exposure. We sold our exposure to Australia to strengthen the US as the yield curve control (YCC) in place there leaves less potential for lower rates. We keep a slight positive duration from short term German rates to hedge part of our credit exposure.
  
• Non-core sovereign exposure. We keep reducing exposure to non-core debt (Greece, Cyprus).
  
• Tactical trade on Spain and Portugal against France to take advantage of the level of spreads that have returned to crisis levels (duration neutral).
  
  

Corporate component

• We continued to be active in the primary market to benefit from attractive premium on high quality paper.
  
• We sold some bonds we bought a few weeks ago on the primary market after a good performance.
  
• We maintain a decent exposure to highly rated and short maturity investment-grade corporate credit designed to take minimal risk and offset the riskier side of our barbell strategy.
  
• We believe that our credit component incorporates an attractive level of valuation relative to fundamental risk and offers a catch-up potential.
  
• Tactical management of credit hedges. We maintain our credit protection (CDS - Credit Default Swap).
  
  

Cash component

• We keep a large allocation to cash items at 22% (cash account, T-bills and money market funds). In addition, we have 10% of our bonds maturing or likely called within the next year.

Overall modified duration close to the maximum at 7.8 and an average rating of BBB+.

Sovereign component

• Long core duration to benefit from a very accommodating environment provided by Central Banks’ policies in particular on the US and EUR yield curves, and to a lesser extent on other yield curves to diversify the positioning (Australian dollar, Canadian dollar, Norwegian krone) as QE (Quantitative easing) will focus on flattening the yield curve.
  
• We took our profits on our US real rates as breakeven are now more reflective and we are still focusing on European inflation-linked bonds (Germany, Italy).
  
• Still a very limited exposure to Emerging markets (EM) sovereign debt, we stay shy on the asset class keeping our long EM index CDS (i.e. equivalent to implementing a short position on EM risk) and favouring countries where we see long-term value.
  
  

Corporate component

• We reduced our exposure via credit protections (Credit Default Swap) as indices have rallied much.
  
• We are still invested in specific situations with attractive risk rewards (idiosyncratic High Yield opportunities, selected stressed Emerging Markets corporates and CLOs), we focus on bottom up convictions due to higher dispersion. Note that, we continue to see a lot of new issuances particularly in Investment grade corporates and some on Emerging markets sovereigns.
  
• Maintain our exposure to financials on both senior and subordinated debt.
  
  

Cash component

• Still a low allocation to cash & money market but enough to ensure liquidity to the portfolio.
  

• The virus is acting as a ‘catalyst’ to an acceleration of the business cycle, creating dislocations and fueling dispersion therefore creating opportunities for bond pickers.
  
• We keep a high net high yield exposure at the top of the range with reduced exposure to our credit hedges.
  
• We are active on primary and secondary markets favouring long term papers in order to benefit from the attractive premiums offered, well in excess of the fundamental cost of risk.
  
• We will continue to focus on specific situations with attractive risk rewards (idiosyncratic High Yield opportunities, selected stressed Emerging markets corporates and CLOs with good overcollateralization) and we remain on the lookout for new opportunities.
  

Stable overall modified duration compared to last week, which stands close to 8.3. The Fund’s average YTM (Yield to maturity) stands at 3.3% now.

Rates component:

• Still a long duration strategy with a diversified exposure to core rates between the US, Germany (both nominals & inflation-linked bonds), Australia and Singapore.
  
• Maintained our low exposure to non-core government rates, with only a small exposure to Greece and we implemented a short position on Italy.
  

Credit component

Long Investment Grade and more modestly High Yield. Still avoid expensive market beta and focus in few specific situations. Physical allocation to some idiosyncratic names where we are well paid for the fundamental cost of risk on both primary and secondary markets. However, we still maintain our level of protection via index CDS (Credit default swap) due to higher dislocation.

Currency component

Limited currency risk in the Fund, as we still favour the euro, we have a decent exposure to the US dollar and to a lesser extent to the Australian dollar and the yen. We shorted some currencies linked to commodities such as Swedish krona, Canadian dollar and renminbi.