Net performance

For the first half of the year, the performance of the G Fund Alpha Fixed Income (GAFI) fund stands at +0.45% (part I-C EUR LU0571101715, dated 01/01/2017, as of 13/09/2017) compared to -0.25% for Eonia compounded.

• Over 1 year (from 13/09/2016 to 13/09/2017), the net performance of the fund is 0.00% versus -0.36% for the Eonia compounded index.
• Over 3 years (from 12/09/2014 to 13/09/2017), the net performance of the fund is 3.63% versus -0.69% for the Eonia compounded index.
• Over 5 years (from 13/09/2012 to 13/09/2017), the net performance of the fund is 7.47% versus -0.47% for the Eonia compounded index.

During 2017, the fund has progressed in separate stages.

At the start of the year, capital gains on issuers from the automotive sector – such as Jaguar, with two profitable in and out operations, or Volkswagen, which returned to the markets with an attractive premium – enabled the fund to launch its year on the up. At the same time, management had implemented a strategy of interest rate spread between private debt securities and their sovereign equivalents: two 2020 issues from Italian banks Veneto Banca and Banco Popolare di Vicenza, with explicit guarantee by the Italian State against a sale of Italian 3-year interest rate futures, in order to hedge against interest rate risk.

We therefore obtain a premium of 60-65 basis points on the issue, which has considerably contracted since its launch (12 basis points as of 13 September 2017). Our preference for the Itraxx Crossover index (basket of CDS ⁽¹⁾ from European issuers rated at the BB/BBB borderline ⁽²⁾) instead of the Itraxx Main index (basked of CDS from European issuers with high credit rating) to hedge our exposure to investment grade credit in paper securities, equivalent to an implicit strategy of decompression of the HY index, was rewarded, especially in May and June.

Moreover, the fund has proved resilient during the phase of rising interest rates and spreads ⁽³⁾ in late June / early July, thanks to its hedges, demonstrating once again that debt arbitrage strategies can generate value independently of market context.

The summer period was calm this year, with few episodes of volatility, which were contained on the credit markets. The presence of liquidity was also limited. So, there were few opportunities for arbitrage during the last few months, with securities remaining in their “trading corridors”. We therefore adopted a defensive positioning, maintaining our hedges.

 

Summer strategies

The beginning of July was favourable to G Fund Alpha Fixed Income. We registered gains by implementing a strategy of narrowing the spread between electricity distribution holding company CTE (Coentreprise de Transport d’Electricité) and its operational subsidiary RTE (société française de Réseau de Transport d’Electricité). We also benefited from the appreciation in AT1 of Spanish bank Sabadell, since we had perceived the inconsistency in its relatively weak showing compared to its peers Santander and BBVA.

Subsequently, during the summer break, the market environment became less liquid and less volatile. Additionally, with flattened risk premiums, the opportunities for negative base strategies were often relatively unattractive. The weight of this type of strategy in the ‘Alpha’ ⁽⁴⁾ component therefore declined considerably with each profit-taking. So, the main performance motors were relatively inactive, especially given that the carry of the “Core” component (consisting of liquid instruments) remained in negative territory.

 

However, since the end of August / early September, the primary market has reopened, allowing us to reposition ourselves actively on certain strategies while remaining faithful to our “market neutral” ⁽⁵⁾ philosophy. Consequently, the “Alpha” component has returned to 35% (as of 13 September 2017).

We have also introduced a new orphaning strategy. In the particular case in question, we have taken a stake in the Holding of a Portuguese company. This company now only issues securities through its operational entity. It now transpires that the securities issued by the Holding will soon be reaching maturity. The CDS on the Holding is therefore “orphaned”, because it no longer hedges the issuer risk of the operational entity but only the issuer risk of the holding company. We are therefore sellers of this CDS, because we judge its spread to be excessive relative to what it is able to hedge.

Finally, we have implemented a discounted value strategy on the issue of a major French industrial company. This issue had reached a low point following a massive sale of several tens of million euros in mid-August. The share price then rapidly rebounded by about 5%.

 

Prospects

We are currently expecting an imminent resurgence of volatility, which should generate new price inefficiencies for arbitrage. In our view, the current risk factors – which represent opportunities for G Fund Alpha Fixed Income – are geopolitical and political (the ability of President Trump to implement reforms). We are also keeping an eye on the resurgence of idiosyncratic risks, such as the recent bankruptcy of Air Berlin or the misfortunes of Provident Financial, which have provoked knee-jerk reactions from the markets.

The high proportion of liquid assets will therefore enable us to position ourselves quickly in response to the appearance of new inefficiencies on the market. We therefore remain confident in the investment process and in our capacity to generate added value over the next few months.

 

⁽¹⁾ CDS Credit Default Swaps. A CDS is a derivative product that hedges against the risk of default by a debt issuer.

⁽²⁾ BB/BBB borderline: frontier between High Credit Quality and High Yield, based on the ratings of a Credit Rating Agency.

⁽³⁾ Spread: difference in interest rates between private debt instruments and their public (sovereign debt) equivalents.

⁽⁴⁾ Alpha: a measure of the ability of an investment manager to create value by being able to detect the bonds or stocks that yield better returns over a given period than would normally be expected given their level of risk.

⁽⁵⁾ Market neutral: strategy that aims to neutralize directional market risk (in this case exposure to the Fixed Income and Credit markets).

 

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.

 

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