Some risk premia

17 September 2018

Gilles Pradère

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


August saw significant performances divergence between assets, with USD ones the best performers in both bonds and equities. Indeed, US equities were up while Europe and Emerging equity markets were down significantly. US bonds have been also up, while European ones exhibited negative performances, and emerging debt erased almost entirely the bounce from the lows made earlier this year. These moves are a good summary of the diverging environment financial assets have to cope with this year.

USD assets enjoys a strong domestic economy, with inflation so far relatively contained, which allows its equity market to benefit. Europe has exhibited relatively good growth so far, but remains hostage to the potential damage of wide scale tariffs imposed by the US administration and uncertainties around the Italian budget. These risks explain higher uncertainties and volatility on large sectors such as Banks and Autos. The spread on Italian debt has also widened close to levels seen in May, with a relatively limited contagion to other sovereign debt in Europe. With the China-US dispute over tariffs still ongoing, emerging countries’ economies remain under pressure, as USD has been reinforced by the dovishness of other central banks, particularly the ECB.

Countries with the weakest fundamentals are under intense pressure, and remain very vulnerable, as long as the USD remains strong, until their imbalances are corrected. But at least the diverging moves of the recent months have created some risk premia which can be seen as opportunities in some instances.

With Italian spreads to German bunds close to 3%, it seems to us that the market now incorporates some negative news, allowing for some pullback in a more moderate scenario on the public deficit. Consequently, we have increased our periphery exposure during the month, pushing it to around 6.9% of holdings, buying a mix of Spain, Greece and Italy. We have also found some relatively robust emerging high grade that are offering a significant discount when denominated in euros compare to the dollar bonds, which enhance the portfolio’s yield. During the month, following the stress on Turkey, we closed our long protection on emerging spreads bought earlier in spring. After significant spread tightening on some of our USD exposures this summer, we closed several positions on banks which have tightened back to low levels of spreads. Our traditional portfolio delivered 0.31% (gross of fees), with the bulk of the performance coming from the USD portfolio.

Our long UST vs swaps had a small positive contribution. We have reduced it last month as we expect its seasonality to provide better entry levels. Our peripheral exposures against core detracted some performance this month, and we took advantage of the selloff to scale into some 5y BTP. Our non-traditional portfolio delivered -0.03% (gross of fees).

As SEK cheapened vs EUR, our exposure detracted some performance. We increased our CAD vs USD at the end of the month to 0.9% of assets as it could benefit from a positive resolution about NAFTA discussions, and also as US authorities seemed to tone down their currencies. We keep a defensive profile on this pocket of risk for the moment as, despite an expensive valuation for the dollar, several factors justify it stays at elevated levels for the time being. Our FX portfolio detracted -0.03% (gross of fees)

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered +0.16% net of fees. Duration stood at 2.9 years and the average credit quality was A+.

*Sources : RAM Active Investments