G Fund Alpha Fixed Income – 2019

17/01/2020

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2019, a very good year for G Fund Alpha Fixed Income. G Fund Alpha Fixed Income (share class I-C EUR LU057110715) grew by 2.31 % over the complete year 2019, or 270 basis points better than its benchmark index, the EONIA compounded rate (-0.39 %). This is the fund's best year since 2012 !

Over 3 years (from 30/12/2016 to 31/12/2019), the fund has net performance of +1.16%, compared to -1.11% for the benchmark index (EONIA capitalized), representing an outperformance of +2.27%. Over 5 years (from 31/12/2014 to 31/12/2019), the fund has net performance of +4.07%, compared to -1.53% for the benchmark index, representing an outperformance of +5.60% .

Net performance 2019

Start-of-year bounce

At the end of 2018, we had accumulated numerous strategies in our portfolio. In a dislocated credit environment, these strategies had suffered, but we were able to maintain our positions. So, we entered 2019 with a significant weight of strategies in our Alpha pocket(1), with important potential for recovery.

This recovery began to materialize during January, thanks to our strategies on undervalued bonds versus other curve segments from the same issuer or versus their peers on the same curve segment, such as the 2030 bond of Japanese company Takeda in the pharmaceutical sector, which was considerably undervalued compared to a 2029 bond from Bayer, despite the fact that Bayer was entangled in controversies involving its subsidiary Monsanto.

Performance was also boosted by purely synthetic strategies, with:

  • pair trading in the French automotive sector (combining Peugeot Long(2) CDS(3) with Renault Short(2) CDS)
  • implicit decompression of CDS indexes (purchase of iTraxx(4) Xover against sale of iTraxx Main).

 

Intense activity in the portfolio

Alpha strategies represented a sizable part of the assets at the start of 2019. With increased profit-taking over the first six months of the year, the share of the Alpha pocket was temporarily reduced relative to the core component, which comprises the most liquid assets. Portfolio activity was boosted by highly tactical strategies, such as a Long Corporate / Short Sovereign strategy on the Italian national railway company or fungible issue(5) strategies, for instance an issue from Logicor:

Logicor Spread 3.25 % November 2028

At the end of August, the Alpha pocket again increased, in particular under the effect of implementing new negative basis strategies and event-driven(6) strategies, notably in the German real estate sector. We also aimed to be more reactive in attempting to capture the premium offered by certain “ESG”(7) fixed-income securities, in a context where supply remains limited compared to the growing demand by financial investors, who are growing increasingly sensitive to the challenges of the energy transition. This rush to invest was clearly visible on the occasion of a new issue by Enel, which in 2019 launched the first SDG bond (Sustainable Development Goal), delivering an annual coupon of 25 supplementary basis points if it fails to meet its green energy goals by 2021.

Premium of the Enel 2024 issue in $ (in bps)

At the end of the year, new profit-taking operations were realized, in particular after capturing premiums on the primary credit market.

 

New strategies that have not yet delivered their full potential

Despite the fact that 2019 was a highly successful year, the portfolio still contains various alpha strategies that have not yet returned their potential. This particularly concerns negative basis strategies (purchase of a bond and purchase of a protection via a derivative having the same maturity on the same issuer, aiming for convergence of valuations between the two instruments) implemented during 2019.

For example, we initiated a negative basis strategy on a German industrial issuer which had an undervaluation of about 70 basis points on its corporate bond compared to the CDS derivative instrument when the strategy was launched last September. We also introduced negative basis strategies qualified as “imperfect”, with a CDS protection that reached maturity before the bond. We took this liberty in order to optimize return prospects, especially in the case of a French company in difficulty in the mass retail sector: here, our main aim is a spread widening between the “secured” and “unsecured” premiums. In addition to the impending arbitrage opportunities that will materialize in 2020, these positive carry strategies offer the fund potential for appreciation.

For the coming months, we expect to see a dynamic primary market, which should reveal new opportunities for arbitrage. Also, the period of quantitative easing of the European Central Bank is traditionally a period when the basis effect is favourable to the fund, with outperformance of the cash securities market versus the synthetic credit market. We therefore remain confident in the investment process and in our ability to generate added value over the next few months.

 

A strategy adapted to a low rate environment

In 2019, certain phases of rise in interest rates and in credit premiums temporarily affected the fixed-income markets. Aiming to remain immune to interest rate and credit risks, G Fund Alpha Fixed Income was able to negotiate these periods quite safely:

G Fund Alpha Fixed Income performance (basis 100) and 5 year German rate

With the end of the summer break, interest rates started rising in September. That did not prevent G Fund Alpha Fixed Income (part I-C) growing 0.51% between 2 September 2019 and 31 December 2019.

• Periods of increases in credit premiums:

G Fund Alpha Fixed Income Performance (basis 100) and Euro Yield spread evolutions (in bps)

There were 3 periods of significant increases in 2019. From 23/04 to 03/06, with an increase of 86 basis points (bps) in the spread of the Merrill Lynch Euro High Yield index, from 29/07 to 15/08, with an increase of 57 bps, and from 19/09 to 08/10, with an increase of 60 pbs. During these periods, the performance of G Fund Alpha Fixed Income (part I-C) was respectively +0.16%, -0.03% and +0.10%, demonstrating its liquid, relatively non-volatile and directional profile.

After the remarkable performance of fixed-income assets last year, valuations this year have become less attractive. In an environment of low interest rates and tight credit premiums, we consider that an approach of the type proposed by G Fund Alpha Fixed Income, i.e. a diversifying approach, decorrelated from the markets and with low volatility, can make sense in a bond asset allocation.

 

For information, the 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.

(1)Alpha: a measure of the ability of an investment manager to create value by being able to detect the securities that yield better returns over a given period than would normally be expected given their level of risk.

(2) Long: a buying position on an instrument / Short: a selling position on an instrument

(3)CDS: Credit Default Swaps. A CDS is a derivative product that hedges against the risk of default by a debt issuer.

(4)iTraxx: indices based on baskets of CDS products. iTraxx Xover: basket of CDS whose issuers are rated BB or BBB. iTraxx Main : basket of CDS whose issuers are considered to be in the Investment Grade field.

(5) Fungible issue: a bond is said to be “fungible” if its issuer has already issued a bond under the same terms (same currency, same coupon, same maturity etc.). We aim for short-term convergence between the price of the fungible bond and that of the existing bond.

(6) Event-driven strategy: strategy of identifying special events in the life of a company (recapitalization, break-up, merger etc.) that can potentially cause major variations in prices.

(7) This acronym designates the Environmental, Social and Governance (ESG) criteria used for conducting extra-financial analysis of a company.

 

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 – ALPHA FIXED INCOME and G FUND – ALPHA FIXED INCOME II, 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