Commentaries

April 2020 - Remain tactical and selective in global fixed income - Tactical Fund Manager's Comments

15 May 2020

Clement Perrette, David Fung, Gilles Pradère

Economy in “full” support mode

Central banks and governments have reacted relatively fast in order to prevent a free fall of the economy. This support diverges across regions though, with the US being more reactive than Europe. The economic answer to the current extraordinary deflationary situation follows Bank of Japan policy of Zero Interest Rate Policy combined with large amounts of assets buying. Despite all these measures, the impact on corporate profit and government receipt will be massive. The below chart shows a US High Yield ETF performance versus US financial conditions, reflecting somehow the fragility of the recovery:

 

                Source: Bloomberg, RAM AI, as of 30.04.2020

 

Arbitrage between larger opportunities and higher risks

In the investment grade bond space, attractive opportunities have emerged after the March 2020 dislocation. Nevertheless, uncertainties still prevail with respect to the full impact of Covid-19 on global growth and we expect volatility to stay with us in the coming quarters. Therefore, keeping a strong discipline in managing the quality and the liquidity of a fixed income portfolio will be key to preserve capital and participate to the upside in the coming quarters.

RAM Global Bond Total Return approach to weather a volatile environment

We continue to believe that very long duration or large credit exposures do not represent the only options faced by investors. A high quality traditional bond portfolio, which is actively managed in terms of duration and credit risk, can be complemented with additional sources of performance in credit, rates and forex markets. By using the available liquid instruments globally in an appropriate and disciplined way, these complementary performance engines have the primary objective of providing uncorrelated return sources and immunise partially or fully portfolio risks. Our investment process, focused on assessing the risk/reward at several levels, proved to be the adequate approach in this environment.  

 

Source: RAM AI, as of 30.04.2020

 

Recent portfolio changes

  • The strong activity in the primary market during the month of March and April presented attractive opportunities in high quality Investment Grade bonds
  • We have recently added new opportunities in EUR and USD Investment Grade corporate bonds since our exposure was mainly tilted towards Sovereign and Quasi-Sovereign names
  • After the strong performance since March, we booked profit on some European corporates
  • With an aggressive Fed and a more constrained ECB, we reduced our European periphery exposure and increased the US IG and Canada agencies exposure
  • In non-traditional strategies, we booked profit on the US 5y10y steeper and USD Asset Swap strategies
  • The portfolio’s average credit quality stands at A-

 

Current positioning

The below table summarizes the positioning of the fund. The “Risk Level” represents our internal risk scaling by strategy, ranging from 0 to 5, with the latter being the highest level of risk within our investment guidelines.

 

 Source: Bloomberg, RAM AI, as of 30.04.2020

 

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