Foto: Manuel
. Los inversores en fondos pagaron menos comisiones que nunca en 2015
A study on U.S. open-end mutual funds and exchange-traded funds, recently released by Morningstar, finds that, on average, investors paid lower fund expenses in 2015 than ever before. The asset-weighted average expense ratio across funds (excluding money market funds and funds of funds) was 0.61% in 2015, down from 0.64% in 2014 and 0.73% five years ago. This decline stems from investor demand for cheaper passive funds (index funds and ETFs) and strong flows into institutional share classes, which carry lower fees. Vanguard also contributed to average fee declines, as its low-cost passive funds continue to attract large flows.
But lower average fund expenses do not necessarily mean investors are paying less for their investments overall, reveals the study conducted by Patricia Oey and Christina West. 2015 saw the strongest inflows to institutional share classes through retirement platforms and to ETFs via fee-only advisors. These channels typically levy another layer of fees in addition to the cost of owning funds, so investors need to consider their total cost of investing. Advisor and retirement platform expenses are beyond the scope of this fund fee study, but they are an increasingly important cost component as investors migrate toward investment services and products with these fee structures.
The recently released U.S. Department of Labor’s final Fiduciary Rule states that any industry professional providing investment advice to IRAs and retirement plans (such as 401(k)s) must put the interest of the investor first, primarily by focusing on costs. This rule may result in more scrutiny and better transparency on the total cost of investing, which we hope will lead to lower investment expenses for the average American saving for retirement.
The asset-weighted average expense ratio is a better measure of the average cost borne by investors than a simple average (or equal-weighted average), which can be skewed by a few outliers, such as high-cost funds that have low asset levels. In 2015, the simple average expense ratio for all funds was 1.17%, but funds with an expense ratio above that level held just 8% of fund assets at the end of 2015. (So it isn’t saying much if a fund company touts “below average fees.”) If we look at the largest 1,000 share classes, which account for about 75% of assets in mutual funds and ETFs, the simple average expense ratio remained at 0.64% from 2013 through 2015, as some fees go up and some go down.
This finding suggests that in aggregate, changes in the fees set by asset management firms across the industry are not contributing to the falling asset-weighted average expense ratio.
Indeed, active funds have seen larger asset-weighted average fee declines when compared with passive funds. This might lead to the conclusion that fee declines among active funds are driving overall fee declines, but this has not been the case. Instead, it has been flows out of more-expensive funds (often active funds) and into cheaper funds (primarily passive funds) that have resulted in lower asset-weighted average fund fees.
Foto: Michael Gordon / Foto cedida. Michael Gordon, nuevo director general para EE.UU. de Lombard International
Lombard International, a global leader in wealth structuring solutions for the high net worth market, appointed Michael Gordon as CEO of its U.S. operations effective May 2, 2016. He will report to John Hillman, Executive Chairman of Lombard International.
Gordon joins Lombard International from his role as Global Head of Insurance Solutions at BNY Mellon. Additionally, he served as Chief Executive Officer of Tiber Capital Management, LLC, a wholly-owned subsidiary of BNY Mellon focused on managing assets for insurance and reinsurance companies. Before BNY Mellon, Mr. Gordon was an executive at New York Life Insurance Company, leading investment and insurance product management, sales and marketing functions.
The announcement is part of a series of strategic developments for Lombard International including the formal launch, in September 2015, of its global life insurance-based wealth management business. This announcement followed the successful integration of Luxembourg-headquartered Lombard International Assurance with U.S.-headquartered Philadelphia Financial.
John Hillman, Executive Chairman of Lombard International, said: “We are thrilled to have someone of Michael’s experience and background to guide Lombard International in meeting our aggressive ambitions for U.S. growth and achieving our goal of building a world class investment platform.”
Lombard International specializes in providing multi-jurisdictional wealth planning solutions through its partner networks across the United States, Europe and Latin America, issuing life insurance policies and annuities from the United States, Luxembourg, Guernsey and Bermuda. Global assets under administration are in excess of USD 75 billion with a global staff number of over 500, including more than 60 technical experts specializing in 20+ jurisdictions.
Foto: David Stanley
. Trinidad y Tobago busca convertirse en un importante centro financiero
Trinidad & Tobago continues to make great strides towards becoming a recognised international financial centre. To be a successful financial centre these days there are a number of factors that a location simply must get right. Factors like a strong regulatory environment, the rule of law, transparency and co-operation with the international community are all in the news at the moment and are vital in becoming a successful centre. They are also critical in building a strong reputation. In order to get these factors in place, Trinidad & Tobago has forged some strong international partnerships which are informing the country’s development as an international financial centre.
In 2015 Trinidad & Tobago signed a memorandum of understanding with the Toronto Financial Services Alliance (TFSA) to help work collaboratively with other international financial centres to promote robust and transparent regulatory frameworks. Janet Ecker, President and CEO of the TFSA said that amongst other benefits “The memorandum will help strengthen Trinidad & Tobago’s position as an emerging financial centre and will support increased investment from international financial companies.”
Trinidad & Tobago has also been working closely with the widely respected international law firm Herbert Smith Freehills (HSF). Andrew Roberts, a partner at HSF, said: “We are delighted to be helping Trinidad & Tobago ensure that their regulatory systems meet the expectations of the international community. Trinidad & Tobago’s commitment to offer the highest standards of regulatory oversight is very encouraging.”
Trinidad & Tobago has recently become a member of the Commonwealth Enterprise & Investment Council (CWEIC) a membership organisation based in London that promotes trade and investment by facilitating engagement between Government and the private sector throughout the Commonwealth. John Pemberton-Pigott, the CWEIC Director of Programmes, remarked that “Businesses require a set of values under which trade and investment can take place – transparency; good governance; respect for the rule of law; enforceable physical and intellectual property rights; equal opportunities and a diverse workforce. Lord Marland, Chairman of the CWEIC said that “our relationship offers Trinidad & Tobago a great opportunity to reach out to the Commonwealth financial community to promote itself as the premier financial centre for Latin America.”
Managed futures strategies have demonstrated the ability to maintain diversifying characteristics when most needed, in a market crisis. In this interview with Robert Sinnott, a portfolio manager at AlphaSimplex Group, subsidiary of Natixis GAM, he discusses crisis alpha, diversifying factors, daily liquidity, and fees. But first, he explains why “the trend” has been his friend during the first few months of 2016.
2016’s market environment has been bumpy. How has your managed futures approach behaved?
We follow a trend-following strategy across global stocks, bonds, currencies, commodities. So in 2016, where the S&P 500 has gone down more than 10% and then come back up, it has been a time when trend-following strategies have shown their diversification benefits. These gains have come from multiple asset classes, including going both long and short in global currencies and both European and U.S. fixed-income.
How do you know when to get in and when to get out?
This systematic trend-following strategy is fundamentally a dynamic asset allocation strategy. We are figuring out when to go long markets and when to go short based on market momentum. We use a mix of quantitative models that track price trends in global markets over short-, medium-, long- and variable time horizons. When the models indicate an up-trend in a particular market, that signals a time to buy that asset; likewise, down-trend indicators will signal a time to sell and often go short these assets.
In terms of an investor’s overall portfolio, if you are thinking about when to enter and exit a strategy that itself is figuring when to enter into and exit out of a market, you are going to compound your challenge. What we find for managed futures, especially trend-following strategies, is that they serve as a long-term diversifier for overall portfolios. Also, I think having a strategic allocation approach rather than a tactical allocation approach makes more sense. If you try to time it, you have a good chance of missing the benefits, as we saw in January of this year. By the time you got in, most of that advantage was probably already experienced by the current holders.
Is liquidity ever an issue?
Because managed futures strategies generally trade liquid futures and forward contracts, they may not be exposed to the illiquidity costs and concerns of many other alternative assets or alternative strategies. Now, while it is possible that a futures market might become illiquid, this is much, much less likely to occur than we might see in other alternative strategies.
What is crisis alpha, and how important is it to ASG?
Crisis alpha is a very, very important concept. It’s actually a differentiating feature for managed futures relative to many other alternative asset classes. Some trend-following strategies have not only provided positive returns during most historical crisis periods, but they actually seem to provide additional positive return during these periods of crisis in excess of their average return in other market environments. This tendency is known as crisis alpha. I should point out that even strategies that have strongly documented historical crisis alpha may not provide positive returns in every crisis and that past results are not indicative of future results. Nonetheless, over the long term, we think strategies that exhibit crisis alpha may serve as a good diversifier in a portfolio, because they may provide returns when other investments are contributing to losses.
When we think of managed futures strategies as a group, it’s important to understand that not all managed futures strategies do the same thing. It depends on what approaches a particular strategy employs. Some focus in on very short-horizon trend signals, while others will only track very long-horizon trends. Still others, including AlphaSimplex, follow short-, medium-, and long-horizon trends, trying to get a more diversified approach.
Can you talk more about the diversifying factors of your strategy?
Because the ASG managed futures strategy considers global stocks, bonds, currencies and commodities, we have many different opportunities to follow throughout the world. We consider everything from the South African rand and the Mexican peso to the German Bund to the U.S. 10-year and beyond.
When we are looking at the positions and how the strategy moves, we get diversification from a broad asset set of liquid exchange-traded futures and currency forward contracts. Diversification also comes from being able to go both long and short in each of these contracts.
So this translates into a true diversifier for investors’ overall portfolios?
Yes, I believe so. A managed futures strategy has the potential to diversify investors’ portfolios in three ways. First, you have the potential for strong performance in down markets. Second, low to non-correlation with other asset classes. And finally, you gain exposure to more types of assets that may help your portfolio even in non-crisis periods.
Higher fees are often associated with managed futures strategies. Why is that?
Well, first of all it’s important to think about what goes into these strategies in terms of infrastructure and trading. We have a 24-hour trading desk that trades in all of the global markets. In addition to that, you have to remember these strategies first came out in the hedge fund area, which has considerably higher management fees.
What type of allocation should investors have in their portfolio?
Obviously it is important for investors to work closely with an investment professional to arrive at the right amount for their portfolio. But, for investors with a large equity allocation, it might make sense to have a meaningful managed futures component in their portfolios because of that propensity of managed futures to provide crisis alpha, as well as diversification from equity risk.
RISKS: Diversification does not guarantee a profit or protect against a loss. Managed futures strategies use derivatives, primarily futures and forward contracts, which generally have implied leverage (a small amount of money used to make an investment of greater economic value). Because of this characteristic, managed futures strategies may magnify any gains or losses experienced by the markets they are exposed to. Managed futures are highly speculative and are not suitable for all investors. Commodity trading involves substantial risk of loss. Futures and forward contracts can involve a high degree of risk and may result in potentially unlimited losses. Short selling is speculative in nature and involves the risk of a theoretically unlimited increase in the market price of the security that can, in turn, result in an inability to cover the short position and a theoretically unlimited loss.
In Latin America: This material is provided by NGAM S.A., a Luxembourg management company that is authorized by the Commission de Surveillance du Secteur Financier (CSSF) and is incorporated under Luxembourg laws and registered under n. B 115843. Registered office of NGAM S.A.: 2 rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg. The above referenced entities are business development units of Natixis Global Asset Management, the holding company of a diverse line-up of specialized investment management and distribution entities worldwide. The investment management subsidiaries of Natixis Global Asset Management conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions. This material is provided by NGAM Distribution, L.P. This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions. Past performance is no guarantee of, and not necessarily indicative of, future performance. 1483285.1.2
CC-BY-SA-2.0, FlickrPhoto: Jacinta Lluch. Durable Source of Alpha Generation: Invert the Pyramid
Many a market practitioner has been humbled in recent years trying to project the direction of US interest rates. Professional forecasters, futures markets, and even the Federal Reserve have all consistently gotten their interest rate calls wrong over the last half-decade. At MFS, explains Bill Adams, MFS Chief Investment Officer, Global Fixed Income at the firm, “we devote a great deal of fundamental analysis to forecasting rates, duration and the shape of the yield curve, and those elements make up an important part of our alpha generation toolkit”. However, given the extraordinarily difficult and unusual market environment of recent years, the firm recognizes there is an unusually low probability of getting one’s rate call correct, and an even lower probability of getting it right consistently. That is simply not a reliable or durable source of alpha generation within a well-managed fixed income portfolio.
In our view, says Adams, consistent alpha generation depends on actively managing multiple sources of risk. “We view the portfolio construction process a bit like an inverted pyramid. At the bottom of the pyramid are the factors hardest to consistently anticipate—rates, duration, and curve positioning. Next come currencies, another piece of the portfolio notoriously difficult to forecast. Against the present market backdrop, unduly influenced by global central bankers, these are the lowest conviction pieces of our alpha pyramid”, points out the CIO.
In the current environment, MFS believes that it can add more durable and sustainable alpha by engaging in a thorough process of analyzing and underwriting both corporate and sovereign credit. So security selection and sector and regional allocations are areas we approach with the greatest conviction. While you cannot generate excess returns without taking risks, we believe it is critical to take risks that are appropriate.
“Allocating assets to multiple regions is an alpha source we embrace”, explains Adams in the MFS blog. “Bringing together securities from multiple regions and reducing home country bias in a fixed income portfolio helps improve risk adjusted returns, in our view. It is also important to look beyond absolute levels of return and focus on relative return opportunities. In isolation, a 10-year US Treasury bond yielding 1.80% is not all that attractive. But compared to a Japanese 10-year JGB with a negative yield or a German 10-year bund with a yield not far north of zero, the value of the US security becomes clearer”.
As we move up the inverted alpha pyramid, the conviction grows. Moreover, MFS prefers underwriting individual credits by leveraging our global research platform to trying to make a significant call on the direction of 10-year Treasury yields. That research capability allows the firm to better manage risk. This is where MFS place its greatest conviction, with a deep understanding of both sovereign and company credit fundamentals. “Our global research platform leverages not only fixed income analysts, but equity and quantitative analysts as well, who provide a deeper understanding of individual corporate credits. To truly understand credit fundamentals, an investor must assemble a complete view of a company’s capital structure”, says Adams.
In the unusual global economic and interest rate environment that exists today, MFS believes fundamental, country-by-country and company-by-company analysis is a much more durable and sustainable alpha source than interest rates bets.
CC-BY-SA-2.0, FlickrDavid Schwartz, FIBA - Foto cedida. David Schwartz, FIBA: "Compliance. Compliance. Compliance"
With FIBA’s annual Wealth Management Forum in Miami just a few days away, we interview David Schwartz, CEO, FIBA, about the industry landscape.
What are the biggest challenges facing the industry in 2016?
The challenge is always “Compliance. Compliance. Compliance”. Regulations continue to be more stringent while the cost of compliance becomes more expensive. This year, however, the theme of FIBA’s forum is “Transformation and Opportunities: The Consolidation Conundrum.” The challenges for 2016 relate to factors that are driving transformation of the industry. The large players are leaving the business, or reducing their involvement. This creates both new opportunities for smaller firms and problems for the industry. We are seeing, and will continue to see, growth in small family-owned wealth management companies. At the same time, we are also seeing more use of digital and the emergence of Robo Advisors. At the same time, the industry is undergoing a gender shift. Over the next few years, half of the world’s wealth will be owned by women. There is also a generational shift as the Millennials acquire their wealth. The industry has to adjust to all of these changes, while remaining compliant.
Addressing one issue at a time, why are the bigger players exiting the industry?
Compliance. There is a lot of due diligence required, and lots of risk involved if you don’t dig deeply enough to uncover the true owner of an asset. The Panama Papers show just how complex it is to see who really owns what. Tax transparency laws have big players questioning just how far they have to go in order to meet compliancy regulations.
Is compliance easier for smaller, family firms?
Smaller firms do not need all the infrastructure required by larger wealth management firms. They have the luxury of being able to concentrate more directly on their clients.
How is the industry responding to the trend towards Robo Advising?
The industry is embracing Robo Advising in two different ways. Some firms are creating their own robo management service in-house, and others are acquiring small, FinTech companies and bringing these in house. Still others are partnering with Robo Advisers. An excellent example is BlackRock, one of the largest global investment firms. BlackRock acquired FutureAdvisor, a small robo firm, and now RBC and BBVA., are partnering with BlackRock’s FutureAdvisor and integrating the service to digitally augment the advice given by their financial advisors.
That clearly demonstrates how digital is transforming the industry, and how quickly these changes can occur. How do industry professionals keep pace?
The goal and the mission of FIBA is to educate our members on the latest trends. We’ve established various groups to study the issues and present them to our members via webinars, conferences, workshops, seminars, forums and other channels. For example, we recently held a webinar on the Panama Papers, and although the advance notice was short, over a thousand members participated.
Can you elaborate on some of the educational programs you provide?
We provide a comprehensive program of learning opportunities, and professional certifications throughout the year. Our Anti-Money Laundering or AML conferences are the largest in the U.S., attracting on average 1,400 attendees from 40 countries around the globe. Our AML certification courses, which are available both online and in the classroom, are among the most respected in the country. To date, FIBA has certified more than 6,000 individuals in compliance and thousands more in technology, bank security, trade finance and related specialty areas. We also hold regular conferences and instruction on technology innovation, bank security, trade finance, and other areas critical to our industry.
Money laundering is an ever-present threat, and compliance a continuous challenge, do you work closely with the regulators?
To stay on top of developments, FIBA frequently meets with regulators in Washington. Our primary focus is on educating our members and helping them comply with new or changing regulations. As advocates for our members, we also work to influence policy. We submit comment letters and position papers to legislators and regulators, and are respected voice for the industry. In running so many varied programs, we invite the regulators to participate and share best practice ideas. As an example, Robert Villanueva of the US Secret Service will be one of the presenters at FIBA’s Wealth Management Forum in May. His topic, “How the Criminal Underground is Targeting the Financial Sector and our Brokerage and Retirement Accounts,” will help wealth planners understand and recognize cyber threats, and how to respond, the regulators have a job to do, and by collaborating we can all stay ahead of the criminal element.
In addition to the Wealth Management Forum, FIBA is hosting several other international conferences in May—plus AML certification courses and other programs, including a Women’s Leadership Program. How do you plan and execute so many events, and remain on top of new developments around the globe?
In keeping our members informed, we stay agile and flexible—and busy. Yes, this month FIBA is hosting our 32nd CLACE conference on Foreign Trade May 22-24. From May 24-2, we will present our 19th annual FIBA ATFA conference on Trade Finance and Forfaiting. We begin our planning about six months in advance, and revise topics as changes occur or new trends emerge. We stay flexible and adapt to the hot buttons. As mentioned earlier, we responded to the Panama Papers immediately with an informative webinar.
There are a lot of hot buttons for the industry right now. How did you land in the “hot seat” as CEO of FIBA?
I am a banker by experience, with more than 30 years as a senior banking professional within the international banking arena. And I am a lawyer by training. When the first and only CEO of FIBA stepped down, it seemed like a perfect fit for me to step into the position. And it has been exciting.
What is the composition of FIBA’s membership base?
We have about equal numbers international financial institutions, our core membership, and non-financial professionals who support or provide services to our industry in some way, including legal professionals, technology solution providers, consultants and others. We are always open to new members.
AXA Investment Managers (AXA IM) appointed Michael Ganske as Head of Emerging Markets Fixed Income. He joins AXA IM in May 2016 from Rogge Global Partners where he was a Partner and Head of Emerging Markets (EM). Michael will report to Chris Iggo, CIO Fixed Income.
Michael has more than 15 years of experience in EM Fixed Income. Prior to his role at Rogge Global Partners, Michael was a Managing Director and Divisional Head of EM Research at Commerzbank (2007-2013) and a Director and Head of EM at Deka Investment GmbH (2004-2007), and Vice President and EM Fixed Income Portfolio Manager at DWS Investments, Deutsche Bank Group (2000-2004).
John Porter, Global Head of Fixed Income at AXA IM, commented: “We are pleased to welcome Michael on board and confident that his in-depth experience will further enhance our global emerging markets fixed income team and capabilities. We have invested heavily in this team with the hire of Sailesh Lad, Senior Portfolio Manager, and Olga Fedotova, Head of EM Credit Research, last Summer. Michael is a key appointment for our team and demonstrates the scale of our ambition in this space as well as our belief that investors will continue to find emerging market debt as an attractive asset class.”
Michael will lead a global team of 12 investment professionals based in London, Paris, Hong Kong and Mexico, managing approximately €5 billion of EM and Asian debt, across three flagship mutual funds and several segregated institutional mandates. The EM Fixed Income team is fully embedded in the AXA IM Fixed Income investment process. Michael’s appointment follows the decision in June to create a global emerging markets (GEM) fixed income team in support of the continued attractiveness of the EM asset class. Michael will be based in AXA IM’s London office.Michael is a German native, holds a Bachelor’s and Master’s degree in Economics from the University of Augsburg, and a Doctorate in Economics from the University of Hohenheim. Michael is also a certified Financial Risk Manager and Chartered Financial Analyst (CFA).
Foto: Scott
. Goldman Sachs simplifica la estructura de comisiones de sus ActiveBeta ETFs
Goldman Sachs Asset Management recently announced that it will implement changes to its fee and fee waiver arrangements for its ActiveBeta Exchange-Traded Funds. Effective May 1, 2016, a unitary management fee structure, together with a reduction in the management fee rate, will be implemented for the US Large Cap, European, international and Japan equities ActiveBeta ETFs.
Under the unitary fee structure, GSAM will be responsible for paying substantially all the expenses of each Fund. The total annual Fund operating expenses will be of 0.09% for the U.S. Large Cap Equity and of 0.025% for the Europe, International and Japan Equity ETFs.
Additionally, the current expense limitation arrangement for the Goldman Sachs ActiveBeta Emerging Markets Equity ETF will be made permanent. Under this arrangement, the Fund’s expenses are capped, subject to certain exclusions, at 0.45%.
Photo: Michael Maeder. Columbia Threadneedle Investments Appoints Sales Director In Zurich
Columbia Threadneedle Investments, announces the appointment of Michael Maeder as Sales Director Financial Institutions with immediate effect. Michael is based in Zürich with direct report to Christian Trixl, who heads up Columbia Threadneedle Investments in Switzerland.
In his role, Michael Maeder is responsible for broadening and deepening relations with financial institutions with a focus on private banks, cantonal banks, independent asset managers and family offices in the German speaking regions of Switzerland and in Liechtenstein.
Michael joins from NN Investment Partners where he had been business development manager since 2009, covering a similar clientele in the same region. He started his career at UBS Investment Bank in 2006 in Zürich. He holds an MBA from International University of Monaco.
Christian Trixl, Head of Swiss Distribution at Columbia Threadneedle Investments, commented: “I am delighted to welcome Michael to our team. Michael’s experience in the Swiss market will help to expand our presence and client relations with financial institutions in Switzerland and Liechtenstein as we strive to offer them the successful investment solutions and products that they demand”.
CC-BY-SA-2.0, FlickrBrice Perin, fund manager at Generali Investments, in charge of GIS Absolute Return Convertible Bond Fund. Courtesy photo.. “A Flexible Absolute Return Approach Enhances the Convertible Bonds’ Convex Profile”
Brice Perin, fund manager at Generali Investments, in charge of GIS Absolute Return Convertible Bond Fund, explains in this interview with Funds Society why it is worthy to use an absolute return strategy in convertible bonds.
What do convertible bonds bring in an environment like the current one?
At Generali Investments we believe that convertible bonds feature an attractive asymmetry between credit and equities, especially in a volatile, uncertain market.
The securities’ hybrid profile automatically adapts to market movements in order to capture on average 2/3 of the market’s upside and limit to 1/3 of the drawdown. In fact, in falling stock markets, the securities automatically lower their equity sensitivity, therefore getting closer to the bond floor.
In addition, we are convinced that introducing a flexible absolute return approach enhances this embedded convex profile, therefore further limiting drawdowns and aiming to capture the market’s upside.
One of the key needs today is true diversification and decorrelation with other asset classes: can your fund accomplish this challenge?
Yes. In fact, convertible bonds combine various alpha drivers such as equities, bonds, credit, implied volatility, ratchet/prospectus clause, and benefit from different market cycles. These components do not always move together at the same time: depending on the market cycle, some would generate alpha while others could underperform and undermine performance. To optimize the different parameters, we have the ability to hedge partially or totally the unwanted parameters, in order to focus on the ones we would like to isolate and benefit from.
How is the absolute return strategy obtained with convertibles?
An absolute return investment approach applied to convertible bonds fund allows us to add arbitrage techniques in a transparent, rigorous and risk-managed UCITS structure. The GIS Absolute Return Convertible Bond fund aims at generating alpha through from both outright «credit» and «equity» exposure offered by our convertible bonds’ long positions and via hedging strategies (which isolate specific alpha creating components) – whether it is a macro hedge, overlay or a micro hedge at the security level. Moreover, those techniques aim to improve the convexity of convertible portfolios and the downside protection offered. Put simply, the concept is based on isolating and exploiting a desired parameter, for example isolating an attractive prospectus (“ratchet”) clause – while limiting or removing the unwanted underlying equity exposure.
What are your objectives in terms of returns and volatility?
Our strategy has an absolute return objective of achieving consistent performance across the market cycle, with a target volatility of 6-7%.
What strategies are applied in convertible bonds in general and specifically in your fund ? Arbitrage strategies, volatility … How do they work ?
Besides the standard outright exposure that convertible bond funds offer (mainly directional exposure on underlying equity and credit), implementing an absolute return philosophy within this asset class allows us to introduce some additional arbitrage and hedge strategies.
The latter consist of hedging partially or totally some of the risks, in order to focus only on some of the convertible bond parameters. As an example, we can hedge the underlying equity risk in order to isolate and implement volatility or prospectus strategies.
When implementing a volatility strategy we aim to benefit from the favorable changes in the implied volatility of a convertible bond, or from the favorable change of the spread between CB implied volatility and realized of the underlying equity. By re-adjusting our underlying equity hedges, we “capture” underlying equities’ volatilities.
Whilst, when investing and isolating the prospectus clause, we aim to benefit from, for example, some issuance premium compensation provided in the case of a takeover (that could be undermined by equity performance if un-hedged). Lastly, we can also decide to adjust the fund’s global sensitivities to equity or credit markets via overlay index positions to limit market drawdowns.
Is it easier to achieve absolute returns with convertibles than with other asset classes? Or more difficult? Why?
The current tumultuous market conditions and uncertainties make it challenging to achieve absolute returns across all asset classes. The heightened volatility and the frequent periods of strong underperformance in global markets (November 2015 to February 2016) enhance the importance of adopting a flexible and benchmark agnostic investment approach.
As mentioned before, convertible bonds carry a hybrid and asymmetric profile which adapts naturally to market movements. In fact the equity exposure (sensitivity or delta) moves in line with the equity markets therefore moving converts closer to their bond floor in periods of sell-off or to more equity-like profiles during market upsides and rebounds. From this perspective we consider convertible bonds have self-adjusting features.
In addition, convertible bonds associate other components such as volatility and prospectus (ratchet) clauses. Being able to isolate these, in order to hedge or invest in each component, allows us to identify the sources of alpha and eliminate partially or completely the underperforming components.
For all of the above arguments we believe that the asset class gives more leeway and opportunities to achieve total returns over the market cycle.
When did the strategy was launched and how it has worked in bullish and bearish periods ?
The fund was launched early 2004 as an outright convertible bond strategy; therefore it has a long track record of over 12 years. In 2015 we thought of revamping the investment approach in order to be able to benefit from more sources of alpha and better navigate across all market cycles. From September 2015 we introduced some hedging and overlay strategies with an unconstrained and flexible investment philosophy. In 2015 the fund posted an absolute performance net of fees of 5.82% for a realized volatility of 5.12%.
Since last September we have experienced some extremely distressed market conditions, with some of the main underlying equity markets losing more than 20% at some point between November and February.
Nonetheless the fund outperformed the convertible and equity markets, as well as the peer group. In fact the fund has realized positive absolute performances since the reshuffle, thanks to an active delta management (mainly via futures and a few contract for difference single name positions) and a rigorous liquidity and credit analysis resulting in a cash portfolio of majorly mainly robust credit names.
Lastly, we have implemented an active risk process and improved our downside risk management, both at the front office and risk management level. Such a process consists of definition of maximum acceptable loss, de-risking mechanisms (implemented with various levels of escalations triggers) and re-risking (activated by loss recovery).
Can the current actions of the ECB help your strategy and fund ?
We believe that the latest ECB intervention will impact the European markets positively. On the credit side it will support valuations within the investment grade space and in certain riskier credit sectors. On the equity side we believe that market volatility could temporarily ease which would also impact on the underlying.
All in all, while we do not think that the recent ECB actions will have a direct impact on convertible bonds, we nonetheless believe that in the short run it will positively benefit the underlying asset classes (i.e. credit and equity), as was the case in the past weeks. This shall also benefit our convertible bond strategies both outright and absolute return. Having said that, should volatility surge again, our absolute return strategy should fully benefit from it.
