Flash G Fund Short Term Absolute Return – 2020 review

Key points

• Despite a particularly volatile year in 2020, G Fund Short Term Absolute Return (SRRI of 3/7 with a minimum recommended investment horizon of 2 years) attained its performance target, finishing the year with a positive net performance of 0.89% (share class I-C LU1891750942), or 1.35% above its reference index, the capitalized EONIA. Since its launch, on 21/12/2018, the net performance of the fund stands at 1.40%, as against -0.87% for the capitalized EONIA.
• The fund showed resilience compared to its peers, confirming the astuteness of our flexible and diversified investment approach.
• The decline in performance of the fund observed in February – March was fully recouped by 17 September 2020. This rapid bounce-back was particularly due to a reinforcement of the credit market, from which the fund was able to profit as from the second quarter.
• The fund still has a positive yield to maturity of 0.35% as on 21 January 2021, thanks to its dynamic, opportunistic and diversified approach.

 

Performance 2020

Since its launch on 21 December 2018, G Fund Short Term Absolute Return (share class I-C) has outperformed the capitalized EONIA by 1.12% in terms of annualized performance:

Data as on 31 December 2020. Source: Bloomberg. G Fund Short Term Absolute Return I-C EUR: LU1891750942. Reference index: Capitalized EONIA. 2018: Fund launch on 21 December. Past performance is not a reliable indicator of future performance

 

Over the course of 2020, after a positive start at the beginning of the year, G Fund Short Term Absolute Return fell sharply, hit by the massive downturns of the market from 19 February onwards.

However, the hedges implemented in the portfolio were able to provide partial absorption of the market shock, as is shown by the comparative performance of the fund during the first quarter relative to the average of its peers. This is confirmed by the graph below, which shows how the portfolio outperformed the average of its peers both during Q1 2020 and over the year as a whole. The foundation of this outperformance was rigorous risk management, since the fund had lower volatility and a lower maximum loss than its universe over the course of 2020.

Data as on 31 December 2020. Source: MorningStar, average of universes / categories. Past performance is not a reliable indicator of future performance.

 

Since hitting its lowest point on 24 March 2020, the fund recovered 5.00% by 31 December 2020.

The composition of the portfolio gave the fund a resilient profile, due to the effect of bounce-back towards par provided by the securities with short maturity (exclusively less than 5 years). The force of this bounce-back increases as the securities approach their maturity date in a context of market normalization.

Our opportunism during the rebound phase, especially by reinforcing the risky asset classes (credit, convertibles and emerging market debt) also enabled the fund to return to its historic highest levels by 17 September of last year.

Données au 31 décembre 2020. Source : Bloomberg. G Fund Short Term Absolute Return I-C EUR : LU1891750942. Indice de référence : Eonia capitalisé. Les performances passées ne constituent pas une indication fiable des performances futures.

 

The principal risks associated with the fund are interest rate risk, credit risk, foreign exchange risk, liquidity risk, risk of capital loss, counterparty risk, derivative risk and risk related to the use of speculative securities.

 

Main fund management decisions that contributed to the bounce-back of performance from March onwards

Summary of investment approach

G Fund Short Term Absolute Return is an absolute return fund that adopts a flexible approach not bound by benchmark constraints. It is founded both on diversification of carry sources and on relative value strategies, while also ensuring strict risk control. So, G Fund Short Term Absolute Return is built on three pillars:

A core pocket, consisting of securities from different fixed-income asset classes worldwide. The residual maturities of the selected securities are less than 5 years.

A satellite pocket, combining directional and relative-value strategies, with the aim of taking advantage of diversified and complementary performance drivers.

The overall portfolio is also subject to strict control of its risk budget for each performance driver, supported, when necessary by a hedging pocket.

In 2020, our core and satellite pockets contributed to the overall good performance of the fund. Our hedging pocket played its cushioning role during the market shock, reducing the volatility of the overall portfolio.

 

In the core pocket, we retained a large proportion of our positions on credit and emerging market debt during the turnaround of the markets, enabling us to benefit fully from the bounce-back. The short maturity of the securities from issuers with solid credit fundamentals provides a spring-back effect towards par.

The bounce-back was all the more profitable for us because we had increased our exposure to certain segments of the market such as convertible bonds. We had been absent from this asset class at the beginning of the year, but during the second part of the year we invested in several convertible bonds that were discounted compared to their pure bond equivalent, such as Unibail-Rodamco-Westfield, Nexity or Korian and Telecom Italia.

To adjust the risk budget during the COVID-19 crisis of last March, we had removed certain sectors heavily impacted by COVID-19 from the portfolio (car hire companies, travel agencies, airlines etc.). Subsequently, we returned to certain issuers that were outperforming their peers in a difficult environment, such as Ryanair.

 

The primary market, which had been closed or almost closed since the stock market storm at the end of February, reopened in mid-March following the reassuring announcements of the central banks. Issuers wishing to finance or refinance their activities came to the market with generous premiums (sometimes of about forty basis points) compared to the existing issues, at a time when issue spreads had already widened considerably during the crisis. We participated actively in these issues, in order to capture the extra yield offered compared to the secondary market.

 

In a monetary environment that became increasingly accommodating with each passing month, the short maturities (2 years) were highly sought after, causing a steepening of the German yield curve in the 2/5-year segment from March onwards, when we implemented our strategy of steepening of the German curve.

At the same time, the economic crash favoured the longer-term segments of the curve (30 years), which are more sensitive to a gloomy economic climate, leading to a flattening of the curve in the 10 / 30-year segment.

Finally, the Federal Reserve put in place a bigger and more powerful arsenal of tools than its European equivalent (ECB) – most notably with a reduction in its key rate – to offset the negative economic effects of the health crisis. This contributed to the sharp drop in American interest rates until the end of March. In early April, we launched a spread strategy between the US and German 10-year government bond yields. Our reasoning was that the US seemed to be showing stronger economic resistance than the Old Continent during the periods following the first lockdown. This observation was confirmed by an increase in the interest rate spread during the remainder of the year. We took all our profit on this strategy on 16 October, before returning to it at the end of the year.

Our hedging pocket functioned well during the extreme risk aversion phase, largely due to our iTraxx Xover synthetic credit hedge⁽¹⁾, which reduced the volatility of the portfolio. However, during the bounce-back phase, this protection cost the fund.

Our exposure to the Yen, as refuge currency against the dollar, functioned well: the fact that exchange rates fell more sharply in the other developed countries than in Japan acted as a brake on the outflow of capital from Japan.

 

Current positioning and prospects

Core pocket: The support of the central banks, which is essential for the credit market, will remain a decisive factor this year. In a context of robust economic recovery, this has prompted us over the last few weeks to look for carry by arbitrage on certain of our positions, i.e. by selling securities with short maturity dates and buying new securities from the same issuers with longer maturity and an additional yield to maturity

• On subordinated debt securities from financial issuers, such as:

• BBVA: sale of bond with call 2021 for a bond with call 2023, offering us a yield of 3.6%
• Banque Postale: sale of bond with call 2021 for a bond with call 2026, offering us a yield of 3.4%

• On emerging markets bonds in hard currencies, such as:

• Mexico: shedding the bond with 2023 maturity to position ourselves on a 2026 maturity
• Indonesia: sale of bond with 2021 maturity for two bonds with maturity in 2023 and 2024
• Romania: sale of bond with 2021 maturity for two bonds with maturity in 2024 and 2026

We consider that the yield curves for these emerging countries, which are rated Investment Grade, offer attractive potential (approximately 70 additional basis points between 1 year and 3-5 years).

Recently, emerging market debts have also had the advantage of not being closely correlated to the euro credit market, thereby enabling us to improve the diversification of the portfolio.

Additionally, we are retaining a pocket of convertible bonds, mainly for bond-type, since they appear undervalued compared to their pure bond equivalents (without equity option), in a context where investors are increasingly shying away from these defensive convertible bonds in favour of convertibles calibrated to rise and fall with the equity markets. For example, we have purchased a Fresenius 2024 and an Elis 2023 convertible with a premium several tens of basis points above their equivalent pure bond:

Strategies launched on 13 January 2021. Source: Exane.

 

This search for optimization of yield has enabled us to post a yield to maturity of +0.35 for the portfolio (as on 21 January 2021).

 

Satellite pocket: With regard to our yield curve strategies, we are retaining our flattening strategy on Germany (10 / 30-year segment), and we have taken partial profit on our steepening strategy on the same country (2 / 5-year segment).

On the basis of the “Reflation Trade” theme that has already been the subject of considerable discussion among the big market players for this year, we have returned to the spread strategy between the US / Germany 10-year government bond yields, since we consider that this strategy still has potential: the economic momentum is more favourable on the other side of the Atlantic, while the monetary measures are inflationist, and a new fiscal stimulus promised by Joe Biden will also boost the inflation figures.

Data as on 21 January 2021. Sources: Groupama Asset Management, Bloomberg.

 

Finally, on the foreign exchange markets, we have put in place a long CNY / short USD, since, in our view, China, being less exposed to the risk of a resurgence of COVID-19 cases, is set for very strong growth in 2021. Also, although China will undoubtedly see a fall in its balance of trade surplus, we anticipate that it will enjoy significant inflow due to the easing of geopolitical tensions with the United States (Joe Biden is expected to take a less aggressive stance than his predecessor).

In 2020, the overall sensitivity of the portfolio generally oscillated between 2.5 and 2.75, close to our authorized upper limit (sensitivity structurally limited to the range between -3 et +3), in order to protect the portfolio in the event of a new phase of risk aversion and to profit from the resolutely accommodating announcements of the various central banks.

By contrast, given the intensification of the vaccination campaign and the prospect of an exit from the crisis, the most recent announcements of the central banks seem to us to be slightly less accommodating. In this context and in response to the extremely low interest rates, we have reduced the sensitivity of the portfolio in this early part of the year, since we consider the risk/reward trade-off to be less attractive than in 2020. The overall sensitivity of the fund is now approximately 2 (as on 21 January 2021).

 

Hedging pocket: We are retaining our positive position on the Japanese currency, which acts as a safe haven in turbulent and volatile periods on the markets. Purchasing the Yen provides us with partial protection in the event of a sudden change in the market’s attitude to risk. Also, in our opinion, the efforts of the Bank of Japan to boost inflation should not have any major effect on the exchange rate.  Finally, the Yen, fundamentally, is one of the currencies with the best positive real rates, and it benefits from a balance of payments that is largely in surplus.

Additionally, we are maintaining our exposure to the iTraxx Xover⁽²⁾ CDS index to attenuate our exposure to credit (1.7% of the portfolio), while retaining the securities of which we are otherwise confident.

 

⁽¹⁾ SRRI: Synthetic Risk and Reward Indicator, which grades risk from 1 to 7 on the basis of a volatility calculation.

⁽²⁾ iTraxx: baskets of credit default swaps (CDS). iTraxx Xover: basket of CDS rated BB and BBB. CDS: Credit Default Swaps. A CDS is a derivative product that hedges against the risk of default by a debt issuer.

 

By Boris Nesme, Specialist Product at Groupama Asset Management.

DISCLAIMER

This document is not intended for “non-professional” European Union investors, as defined in “MiFID” (EU Directive 2004/39/EC dated 21 April 2004) or any other local regulation. Similarly, in Switzerland, this document is not intended for investors not classified as “qualified investors” under the applicable legislation. As a general rule, this document must not be transmitted to private clients or individuals as defined in any legislation, nor to “US Persons”.

This document contains information concerning G FUND – SHORT TERM ABSOLUTE RETURN, a compartment of G Fund (also referred to as “the SICAV”), a Luxembourg-based undertaking for collective investment in transferable securities (UCITS), covered by part I of the Law dated 20 December 2002 and constituted in the form of a “SICAV”(Société d’Investissement à Capital Variable – a European publicly traded investment company structure for open-ended funds). The SICAV is registered with the Luxembourg Trade and Companies Register under number B157527. Its registered office address is 5, allée Scheffer, L-2520 Luxembourg. G Fund was authorized for trading by the Luxembourg financial authority CSSF (“Commission de Surveillance du Secteur Financier”). 

Investors are advised that not all compartments of the SICAV are necessarily registered, authorized for commercialization or accessible to all investors in all jurisdictions. Before subscribing to a compartment, the client must take due note of the complete prospectus of the SICAV and of its latest annual and half-yearly reports and its articles of association. These documents are available free of charge at the registered office of the SICAV or at the registered office of the authorized representative accredited by the competent authority in each jurisdiction concerned.

Investment in the compartments of the SICAV involve risks. Investors must fully inform themselves of these risks before any subscription and must make sure that they have understood the present document. We recommend that all potential investors contact an advisor to determine whether this investment is suited to their profile.

The performance of a compartment is not guaranteed but can vary both upwards and downwards. The past performance of a compartment is not a reliable indicator of the future performance of the same compartment. Performance is quoted excluding the costs and commissions charged for subscription/redemption.

This document is not an investment recommendation. Similarly, this document does not constitute an offer of purchase or request to sell in countries where the compartments of the open-ended fund are not authorized to be traded or where any such offer or request would be illegal.

The commercial teams of Groupama Asset Management, the G FUND management company, are at your service if you wish a personal financial recommendation.

Published by Groupama Asset Management – Registered office: 25 rue de la ville l’Evêque, 75008 Paris – Website: www.groupama-am.com