Flash YTD G Fund Short Term Absolute Return

04/06/2021

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Since its launch on 21/12/2018, the net performance of G Fund Short Term Absolute Return is 1.69%, compared to -1.07% for the capitalized EONIA (share class I-C LU1891750942, data as on 31 May 2021). For 2021, the fund has recorded net positive performance of 0.29% (as on 31/05/2021), outperforming its reference index, the capitalized EONIA, by 49 basis points.

Key points

  • Since its launch on 21/12/2018, the net performance of G Fund Short Term Absolute Return is 1.69%, compared to -1.07% for the capitalized EONIA (share class I-C LU1891750942, data as on 31 May 2021). For 2021, the fund has recorded net positive performance of 0.29% (as on 31/05/2021), outperforming its reference index, the capitalized EONIA, by 49 basis points.
  • The fund benefited both from the strategies of its core pocket, focusing on the goal of optimized yield, and from the diversifying strategies of its satellite pocket, which generally have only little correlation or negative correlation to the strategies of the core pocket.
  • in the current context of ultra-low sovereign and credit yields, we consider that G Fund Short Term Absolute Return has adopted the appropriate investment approach, remaining flexible and dynamic, with the capability of reducing its sensitivity to interest rates while optimizing yield to maturity.

 

YTD performance 2021

Net YTD performance 2021

Data as on 31 May 2021. Source: Bloomberg. G Fund Short Term Absolute Return I-C EUR: LU1891750942. Reference index: Capitalized EONIA Short-term euro market indexes for sovereign debt (Barclays Euro Treasury 1-3 TR EUR index) and credit (Barclays Euro Corporate 1-3 TR EUR index). Past performance is not a reliable indicator of future performance

 

The main risks associated with the fund are: interest rate risk, credit risk, foreign exchange risk, liquidity risk, capital loss risk, counterparty risk, derivative instrument risk and risk intrinsic to the use of speculative instruments.

The good behaviour of the fund is due to a variety of performance drivers, especially our short positions on rate derivatives, our curve strategies and our alertness to opportunities to obtain carry on subordinated debt and high-yield securities.

Compared to more traditional investments – which are benchmarked and confined exclusively to Investment Grade products –  during this early part of the year the fund has been able to exploit its greater flexibility in duration management and on its broader diversification, with a larger spectrum of products in terms of both asset types and geographical exposure.

 

Performance drivers

Recap of the investment approach of the fund

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.

Year to-date, the core and satellite pockets have contributed positively to the performance of the fund. By contrast, with no major market shock in 2021, the hedging pocket has had a slightly negative effect.

 

Core pocket

Targeting optimized carry

In a context in which banks and governments are continuing to do everything in their power to avoid putting a brake on the economic recovery, companies remain the focus of considerable support.

Despite the rise in interest rates observed in the first few months of the year, corporate bonds performed relatively well, and we are sufficiently confident to maintain our exposure to this asset class. We have reinforced our exposure to issuers in the cyclical sectors and/or issuers that have been impacted by the consequences of Covid-19 (health, packaging, construction and gaming), in particular those that had value on the short-term segments of the curve.

In this spirit of improving the carry of the portfolio, we sold certain securities that we considered expensive in order to buy securities that we felt were more attractive, in particular by positioning ourselves further along the yield curve (for example selling Arcelor 2023 to buy Arcelor 2025). We are currently close to our investment limits for high-yield corporate debt(1) (max 20%).

We have adopted the same approach on emerging market debts and on the Romania Government Bond with maturity in 2026, which replaced the 2024 bond, giving additional yield of 70 basis points. 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.

 

Targeting discounted bonds

Our convertible bonds pocket (approximately 2.5% of the portfolio at the end of May 2021) has held up well in this favourable environment for risky assets. We made the decision to turn our attention mainly towards convertible bonds that were undervalued compared to their pure bond equivalent. Since making our investments, these differences have been partially absorbed, as in the case of the Elis or Fresenius securities. However, we are keeping a large number of these bonds, since they provide a positive carry.

Elis - premium at launch of strategy (in bp)

 

Fresenius - premium at lauch of strategy (in bp)

 

 

 

 

 

 

 

 

Data as on 31 May 2021. Strategies launched on 13 January 2021. Source: Exane.

We have also been on the lookout for opportunities on issues in other currencies. For example, we have now positioned ourselves on an Italy Government Bond denominated in US dollars, which, after hedging for interest rates, offers 80 basis points higher yield than its equivalent in euros. In our view, Italy Government Bonds in euros are no longer attractive and provide little diversification during periods of rising interest rates, and we have therefore shed them from the portfolio.

 

Satellite pocket

Yield curve strategies

Fuelled by increased anticipations of inflation, the tensions on interest rates that were already discernible at the end of 2020 and have continued into this year complicate the hunt for yield in the sovereign debt universe. For this reason, we have decided to take our full profit on our flattening strategy on the German curve (short on the 10-year segment and long on the 30-year segment).

By contrast, we are maintaining our strategy of steepening of the German curve for the shorter-term segments (short on 2-year segment / long on 5-year segment), which we have applied since March, in the expectation that the ECB will be reluctant to normalize its monetary policy, in particular with regard to its conventional measures such as its key rate levels.

 

Inter-country strategies

The vigour of the American economy, boosted by early lessening of Covid restrictions, has caused the rates of US Treasurys to rise. This prompted us to target a faster rise in US bond yields than for eurozone interest rates.

Today, we consider that bond yields in the United States have little further upward potential, since the main good news is now behind us. Meanwhile, in the eurozone, the economic rebound observed since the beginning of April due to the acceleration of the vaccination campaign and the progressive reopening of non-essential shops is expected to put pressure on sovereign rates. These factors prompted us to close our spread strategy between US and German government bond yields in the 10-year segment.

US and Germany 10-year rate (in %)

Data as on 31 May 2021. Sources: Groupama Asset Management, Bloomberg.

 

Also, since May, we have positioned ourselves on a spread in 10-year bond yields between the US and Canada.

In the light of the increase in oil prices and the predominantly restrictive tone of the Bank of Canada (BoC), Canadian interest rates are at the same levels as US rates, which is historically very rare. So, the strategy appears attractive and has a generally defensive profile, to guard against a rise in risk aversion in the event of a correction in oil prices or a more relaxed tone from the BoC.

US and Canada 10-year bond yield (in %)

Data as on 31 May 2021. Sources: Groupama Asset Management, Bloomberg.

 

Inflation-linked bonds / Nominal bonds

The robustness of global demand, despite the difficulties of the supply side in keeping up (problems of supply, shortages in some sectors, such as semiconductors), is driving prices up. So, we are maintaining our preference for US breakeven inflation rates, which are more sensitive to higher commodity prices than Europe. Market traders may also spread panic on the expectations of American inflation.

 

Hedging pocket

We also have a slight long bias on the dollar against the euro, which generally comes into play when the mood of the market changes for the worse.

We are maintaining an iTraxx Xover(2) synthetic credit hedge, although we have shed some of this protection since we consider that the risk of a sudden market downturn is currently limited.

 

Current positioning and prospects

As on 30 May 2021, we have a gross yield to maturity of 0.44% for the G Fund Short Term Absolute Return portfolio.

For the next few months, we will be keeping to the same approach that has generated positive performance over the first five months of 2021.

In other words, we expect to profit from potentially attractive risk-adjusted returns on the “spread” asset classes in order to generate carry. With regard to fixed-income products, we have progressively reduced the duration of the portfolio, from 2-2.5 years to less than 2 years (1.6 at the end of May): this is because, in the light of the economic recovery and the rise in inflation figures, central banks, especially in the US, will be forced to adjust their ultra-accommodating tone.

In this environment, G Fund Short Term Absolute Return is well-placed to continue outperforming Eonia capitalised index, with limited and controlled market risks:

  • Flexibility of the investment approach,
  • Low duration,
  • Limited exposure to credit risk, with a minimum average rating of Investment Grade

Since its launch on 21 December 2018, G Fund Short Term Absolute Return (share class I-C) has outperformed the capitalized Eonia index by 1.13% in terms of annualized performance

Net performance (since lauch on 21/12/2018)

Net performance

Data as on 31 May 2021. Source: Bloomberg. G Fund Short Term Absolute Return I-C EUR: LU1891750942. Reference index: Capitalized EONIA Fund launched on 21 December 2018

Past performance is not a reliable indicator of future performance

 

 

(1) High Yield: credit rating strictly below BBB- by the Credit Rating Agencies. Investment Grade: high credit quality according to the Rating Agencies (minimum rating BBB-).

(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, Product Specialist 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