A leading fixed income fund manager at Pictet says it is crucial to avoid some biases traditionally commonly found when investing in the asset class, but which markets have ‘acted in defiance of' recently.
A leading fixed income fund manager at Pictet says it is crucial to avoid some biases traditionally commonly found when investing in the asset class, but which markets have ‘acted in defiance of’ recently.
Raymond Sagayam, manager of the Swiss group’s Pictet Total Return-Kosmos fund, adds that it is important global fixed income strategies are truly global, not European or US, with a nod to other markets.
“You need the ability to derive alpha in all markets,” he says. “We are positioned between pure macro and relative value, and long and short. We change our profit centres and attributions very carefully.”
Sagayam says being truly global helped him and co-manager Kazik Swiderski lower their fund’s volatility – important, as their return target of 6% to 10% is accompanied by a volatility aim of 5% to 8%.
He adds it is important not to be lumbered with traditional biases found in some fixed income strategies, such as necessarily buying lower rated securities to boost returns; or having a disproportionate exposure to financials; or a reliance on positive income or ‘carry’.
“This can all lead to hidden risks over time,” he says.
While avoiding slavish adherence to biases, Sagayam and his team have protected the portfolio from volatile markets and tail risks. Despite launching the Ucits fund in June 2011 into some of the most turbulent market conditions in Europe for years, the fund has made 4.5% net since, on volatility of just 1%. In addition, its largest peak-to-trough drawdown is just 0.49%.
Sagayam says funds mandated to focus just on developed markets may struggle to deliver useful returns on acceptable levels of volatility. His team has been able to buy downside protection selectively, using gains harvested from investments as far afield as Qatar and Saudi Arabia, for example.
“For quasi-sovereign credits there, AA- or A-rated, you’re getting paid between 200 and 250bps Libor spread, and that by itself can fund most shorts you have in European investment grade right now.”
The team faces a challenge, along with its peers, of finding affordable shorts in Europe, while not diminishing the fund’s overall returns by having to spend too much on protection in case the worst happens.
Buying protection when it is priced more cheaply as markets become occasionally complacent, as they were in February, rather than in April or May, when they were not, has helped.