Risks, valuations and rewards

14 January 2021

Gilles Pradère

RAM (Lux) Tactical Funds - Global Bond Total Return fund - Gilles Pradère Senior Fund Manager, Fixed Income

Risk assets benefited again in December. Equities outperformed across the board, as well as High Yield and Emerging debt within the Fixed Income space. Despite this risk-on tone, yields on safe assets remained relatively stable, allowing High Grade bonds to also deliver a positive performance.

The impressive fiscal and monetary policy response since March, followed by the arrival of the vaccine at the end of the year has allowed financial assets to largely anticipate the rebound of the economy, tactically pushing valuations to less attractive levels at year-end.

With some economic sectors constrained at least during winter, it is crucial that both fiscal and monetary policies remain supportive, and these policies need to be maintained well beyond the beginning of the recovery. Damages done to public and private sector balance sheet during this historical contraction are large and significantly higher yields might quickly be harmful. The vaccine rollout, that will take time before herd immunity is reached, and the virus mutations, that could impede its efficacy, are two risks that need to be kept in mind.

Overall, we expect this environment to remain broadly favourable to Fixed Income as the Japanese medicine, a combination of ZIRP and QE, must be maintained to support the recovery. But tactically, we remain disciplined and book profit as some valuations have become less compelling.

Supported by this environment, High Yield and Subordinated Financial Debt continued to perform in December. As this segment of the market still offers some value and is at this stage a modest part of the portfolio, we continue to keep it. Our Developed and Emerging Markets High Grade exposures did also well, and we took the opportunity during the rally to book profits on some USD High Grade exposures that offer less attractive valuations. Our traditional portfolio delivered +0.45% (gross of fees).

Constrained by central banks activity, rates markets exhibited little volatility in December. Our long Germany 10-year against 30-year was unchanged. With German rates low, we keep the strategy and we expect it to benefit in a correction. Our long Austria 100-year vs Germany 30-year, which is an attractive convexity play on German rates, was also unchanged. Our non-traditional portfolio was flat. (gross of fees).

Our Fx strategies benefitted again from the soft USD environment. We booked some profits on the NOK, reducing the exposure to 0.75%. We remain long SEK, JPY, NOK, CAD against USD and EUR. Our FX portfolio delivered +0.14% (gross of fees).

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +0.50% net of fees. The duration stood at 4.5 years and the average credit quality was AA.

Source: RAM Active Investments.