Groupama Ultra Short Term Bonds
The net performance of Groupama Ultra Short Term Bonds (share class I-C, FR0012599645) is down 0.24% since the beginning of the year (as on 11 March 2020). Its benchmark index, the capitalized EONIA, is down 0.09%. We consider this performance to be consistent with its positioning, which is more limited than the performance of the 1-3 year credit universe and lower than the performance of money-market funds.
- The net performance of Groupama Ultra Short Term Bonds (share class I-C, FR0012599645) is down 0.24% since the beginning of the year (as on 11 March 2020). Its benchmark index, the capitalized EONIA, is down 0.09%. We consider this performance to be consistent with its positioning, which is more limited than the performance of the 1-3 year credit universe and lower than the performance of money-market funds.
- The extension of the rate duration close to its limit enables the fund to demonstrate resilience during market shocks.
- The convulsive movements on the markets are causing price dislocations on the money and short-term credit markets, generating opportunities for a fund such as Groupama Ultra Short Term Bonds. We have already grasped certain of these opportunities, exclusively on investment grade corporate securities.
- The collapse of valuations increases the attraction of money-market and very short-term fixed income instruments, providing a performance cushion for the coming months, when the health situation will return to normal.
Recap of our investment philosophy
Groupama Ultra Short Term Bonds was launched almost 5 years ago, on 23 March 2015, in response to declining yields on the money market. It therefore aims to deliver higher yields than money-market funds over its investment horizon (6 months), while still being considered to be a cash equivalent vehicule for company balance sheets.
For this purpose, Groupama Ultra Short Term Bonds has a wider range of instruments at its disposal than “conventional” money-market funds:
- Residual maturity of the instruments up to 3 years
- Credit duration (WAL*) extended to a maximum of 540 days
- Issues denominated in currencies other than the euro, with systematic hedging of exchange risk
By investing slightly further along the curve than money market funds, the fund is more volatile in periods of stress on the short-term credit market. However, the duration rate risk (WAM*) will remain below 180 days, as for the other money-market funds.
The fund can use derivative instruments in order to more effectively steer the interest rate risk (futures, swaps), credit risk (single-name CDS) and foreign exchange risk (systematic hedging), while remaining strictly within its management framework.
Groupama Ultra Short Term Bonds (share class I-C, FR0012599645) has recorded a performance of -0.24% since the beginning of the year (as on 11 March 2020), whereas its benchmark index, the capitalized EONIA, has a performance of -0.08%. The 1-3 year credit universe, represented by the Barclays Euro Corporate 1- 3 year index, is down 0.45%.
Over the longer horizons, the fund shows a higher performance relative to its reference index:
Source: Bloomberg, Groupama Asset Management, as on 11 March 2020. Share class I-C FR0012599645. *Fund launched on 23 March 2015. Past performance is not a reliable indicator of future performance
Over a rolling period of one month, although the negative performance of the fund is more marked, it remains in the same order of magnitude as the performance observed during previous stress episodes (Autumn 2015 and the last quarter of 2018), whereas the markets, this time, are much more volatile.
Source: Bloomberg, Groupama Asset Management, as on 11 March 2020. Share class I-C FR0012599645. Past performance is not a reliable indicator of future performance.
Positioning and portfolio activity
Optimal rate duration to ensure resilience to market shocks
The vigilance demonstrated by central banks with regard to the worldwide growth potential has prompted us to progressively extend the rate duration (WAM) in our portfolio during the course of the year. This extending has intensified as the market environment has become increasingly risk-averse.
On 11 March, the WAM of the fund was close to its limit of 180 days, thereby fully benefitting from the significant drop in interest rates:
Our negative vision of Italian sovereign debt proved correct
Since the beginning of the year, we have also benefitted from our short position on Italian sovereign debt, implemented via Futures. The historically low interest rates on the country’s debt did not seem to reflect the fundamental dynamics of the country, which is heavily indebted and mired in sluggish economic activity. The epidemic in the country risks weighing heavily on public finances and the dynamics of the debt in 2020. We have reinforced this selling position over the year. After briefly taking profit, we reset our position on Monday 9 March.
Longer credit duration
For different reasons, we have also been extending our credit life (WAL) since the beginning of the year. From approximately 200 days in early January, the WAL stood at 326 days on 11 March (authorized range: 0 to 540 days).
Given the very tight levels on the credit markets, we adopted a prudent approach at the start of the year. The historic credit spread widening, which has accelerated over the last few weeks, has in particular enabled us to invest in the secondary market, at levels that we had not witnessed for several years.
Source: Bloomberg, as on 11 March 2020 Credit spread index of the Barclays Euro Corporate 1-3 years
Reinforcement of the credit pocket on investment grade issues to benefit from the increased spread
For purchases judged to be at bargain price, we are focusing mainly on investment-grade issuers that are considered internally stable. This reflects the fact that fixed-income securities have tumbled indiscriminately, with little consideration of the fundamentals of the companies concerned. This has created investment opportunities for us. We are prioritizing investments that will be eligible for the money-market funds by the end of the year. This eligibility provides strong support to the securities.
So, we are concentrating mainly on securities with an average residual security of approximately 18 months. At present, in the current market configuration, we are only investing marginally in securities in the 2-3 year maturity segment, which is the segment most sensitive to market tremors in our investment universe.
Sectoral allocation: prudent in cyclic sectors, confident in the banking sector
In our portfolio rotation, we are prioritizing the least cyclical sectors, avoiding for example the automobile and leisure sectors.
In the energy sector, we are steering away from the oil and gas services industry, preferring investments in the major oil companies, since we are confident of their ability to honour their debts with 12 or 18-month maturities, even though the price of oil per barrel has been heavily hit.
Although last Thursday’s intervention by the European Central Bank did not succeed in reassuring the markets, it nevertheless provided substantial support for the banking sector. The deposit rate was not reduced, thereby avoiding adding further pressure to bank margins. Also, for the first time, banks will be able to borrow at -0.75% and deposit their funds at 0.50%. This amounts to a zero-risk investment with a 0.25% rate of return! Moreover, temporarily, the requirements for compliance with regulatory ratios have been eased.
So, in the banking sector, we are prioritizing the national leaders, such as BNP Paribas or Morgan Stanley, among others. We have also invested in a Citi Group green bond.
Finally, as proof of the tension in valuations, we have been able to obtain a Lloyds issue with a residual maturity of 2 weeks and an offered return of 0.80%. This example illustrates the significant widening of bid-ask spreads – in an environment where paper is hard to find, with some banks closing their books – so that excellent price levels can be obtained.
Portfolio remaining liquid at all times
The liquidity of the portfolio remains very high, with at least 20% of securities with a residual maturity of less than 1 month, combined with almost 8% investment in money-market funds.
After the supporting actions announced by the major central banks over the last few days, we remain vigilant with regard to the future coordinated measures to be taken by the governments of the world’s major economies in response to the economic and health crisis.
We continue to think that the current market shock is transitory.
The historic movements on the market provide us with opportunities to improve the yield prospects of the portfolio while reinforcing our exposure to investment grade issuers. This should enable us to deliver positive performance in the course of the next few months.
The short-term maturity of the instruments in the portfolio constitutes a powerful springboard effect for a return to par value of the securities that have recently declined in price.
As a reminder, the main risks associated with the fund are interest rate risk, credit risk, liquidity risk, capital loss risk and derivative instrument risk.
* WAM (Weighted Average Maturity) : the weighted average maturity corresponds to the interest rate sensitivity, expressed in days WAL (Weighted Average Life) : the weighted average life corresponds to the credit sensitivity, expressed in days
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Past performance is not a reliable indicator of future performance
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Edited by Groupama Asset Management – Headquarters: 25 rue de la ville l’Evêque, 75008 Paris – Website: www.groupama-am.com