Flash Coronavirus – Groupama Crédit Euro / G Fund Crédit Euro ISR

18/03/2020

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The panic on the markets has inevitably hit all asset classes dubbed "risky". However, the decrease in rates has succeeded limiting the falls in corporate bond prices.

KEY POINTS

  • The panic on the markets has inevitably hit all asset classes dubbed “risky”. However, the decrease in rates has succeeded limiting the falls in corporate bond prices.
  • In our Groupama Crédit Euro and G Fund Crédit Euro ISR(0) funds, our position of over-exposure to credit movements has been balanced by protections on the derivatives market.
  • The sudden correction of corporate bonds has restored the attractiveness of this asset class. However, since the volatility of the markets remains out of all proportion, we prefer not to reassess our strategies upwards for the present time.

 

RECAP OF OUR INVESTMENT PHILOSOPHY

Groupama Crédit Euro and G Fund Crédit Euro ISR are two bond funds investing in corporate debts. The choice of securities essentially focuses on investment-grade corporate bonds denominated in euros.

We aim to outperform our benchmark index, the Barclays Capital Euro Aggregate Corporate Clôture, by exploiting 5 main performance drivers: directional exposure, sectoral allocation, issuer selection, country allocation and derivatives overlay.

G Fund Crédit Euro ISR differs from Groupama Crédit Euro by the adoption of an “SRI Core” approach based on a best-in-class methodology, i.e. prioritizing issuers judged to be the most socially responsible in terms of ESG(1), with overexposure to quintiles 1 and 2 compared to their benchmark index, underexposure to quintile 4 and exclusion of the least socially responsible (quintile 5, or 20% of the index). In addition, the management of this fund takes into account our list of major ESG risks.

Derivative portfolio instruments can be implemented as hedges to control interest rate risk and credit risk without having recourse to a leverage effect.

 

PERFORMANCE

Since the beginning of the year, Groupama Crédit Euro (share class M-C FR0010758847) and G Fund Crédit Euro ISR (share class M-C FR0010702159) have negative performance (-2.12% and -1.86% respectively, as on 12 March), due to the effects of the credit spread widening. However, the corporate bonds yield component has played its cushioning role. Relative to their benchmark index, the Barclays Capital Euro Aggregate Corporate Clôture, the funds suffered from their out-of-benchmark exposure (in particular high-yield). The exposures to the peripheral debts were further negative factors.

By contrast, over-exposure to interest rate risk was a positive driver in relative performance. Sector allocation (over-exposure to non-cyclical sectors versus cyclical sectors) also mitigated the underperformance of the funds.

Net performance

Source: Bloomberg, Groupama Asset Management, as on 12 March 2020. Groupama Crédit Euro: share class M-C FR0010758847. G Fund Crédit Euro ISR: share class M-C FR0010702159. Benchmark index for both funds: Barclays Capital Euro Aggregate Corporate Clôture. Past performance is not a reliable indicator of future performance

As a reminder, the main risks associated with the two funds are interest rate riskcredit riskliquidity riskcapital loss risk and derivative instrument risk.

The recommended investment term for both funds is more than 3 years.

 

POSITIONING AND PORTFOLIO ACTIVITY

Managing volatility since January

During periods of intense stress on the markets, with a lack of liquidity in bond universe, the most common derivative instruments retain high level of liquidity.

From the first signs of the epidemic in China, we had protected our Groupama Crédit Euro and G Fund Crédit Euro ISR funds via the derivative market, to counterbalance our position of over-exposure to credit, by buying iTraxx Main(1) index. We have maintained this hedge in the portfolio.

We have also established optional strategies on iTraxx Main and iTraxx Xover(1), with strike prices that were very out-of-the-money at the time. We took profit on the latter optional strategy after the first major stage of credit spread widening, and this enabled us to lock in a gain of 10 basis points for our portfolios.

To offset the more aggressive bias of Groupama Crédit Euro, the credit hedge has overall also been slightly more sustained for this fund.

A more conservative approach to High Yield debt

With regard to the fixed-income securities in the two funds, we have approximately halved our exposure to High Yield securities by reselling the most volatile instruments. We have only kept our high-yield debt securities from issuers that are reputedly investment grade.

Sectors: financial securities keep their assets

From a sector point of view, we are maintaining our preference for financial securities, with a bias to the subordinated debts of national leaders. Although the set of measures announced last Thursday by the European Central Bank was not enough to reassure the markets, it nevertheless provides 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 risk-free investment with a 0.25% rate of return! Moreover, temporarily, the requirements for compliance with regulatory ratios have been eased.

By contrast, we are under-exposed to the cyclical sectors most sensitive to an economic downturn, namely the automobile sector, basic industries and metals / mines. On the other hand, we are investing in the sectors least exposed to a contraction in activity, such as the Utilities, Telecommunications and Non-cyclical Consumer sectors.

Maintaining our positions on peripheral debts and yield curves

In terms of countries, we are maintaining an over-exposure to the corporate debts of the peripheral countries (Spain, in particular, and, to a lesser extent, Italy).

On the credit yield curve, we are prioritizing the intermediate 3-7 year segment and are under-exposed to the long segments (15 years and over), which are more sensitive to a shift towards higher interest rates.

 

PROSPECTS

Attractiveness recovered, but prudence still advisable

After the most recent movements of widening credit spreads, this asset class is recovering its historic attractiveness.

Spread of the Investment Grade Credit Markets over 5 years (in %)

Source: Bloomberg, Barclays Capital Euro Aggregate Corporate, as on 12 March 2020. Investment Grade: high-quality credit rating

Nevertheless, the markets can be expected to remain volatile over the next few weeks. Therefore, in view of the resulting market dislocations, prudence remains advisable.

So, we are adopting a globally neutral position in terms of credit risk.

 

(0) ISR: ISR is the French acronym for SRI, Socially Responsible Investment

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

(2)iTraxx: indices based on baskets of CDS products. iTraxx Xover: index of BB and BBB rated CDS products. iTraxx Main: index of high credit quality (Investment Grade) CDS products

 

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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