Navigating bonds

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French boutique Amiral Gestion has launched its first fixed income strategy at the end of last March. InvestmentEurope has caught up with its manager Jacques Sudre (pictured).

Sailing the current stormy bond markets requires strong experience from fixed income fund captains. Paris-headquartered Amiral Gestion counts on that of Jacques Sudre for the management of the Sextant Bond Picking fund, its first ever pure fixed income strategy launched on 30 March 2017.

That is not to say there has never been any experience of bonds; over the past 14 years the boutique has invested in the asset class through its diversified Sextant Grand Large fund and through its private wealth management division.

Sudre himself was poached from La Française AM during the summer of 2016 to bolster the firm’s bond expertise, since assets under management of Sextant Grand Large were increasing as well as the size of the bond pocket in this vehicle.

The Sextant Bond Picking fund invests in opportunities across the fixed income spectrum by applying the fundamental value approach that characterises Amiral Gestion, which has some €3.2bn in overall AUM.

“An example of the fund’s opportunistic approach is our investment in Unicredit’s subordinated debt issued in Singaporean dollars that returns a 6.7% yield – a 5.4% yield when including a currency hedge – whereas the same tranche issued in euros would yield no more than 3%,” Sudre argues.

The manager says the fund carries a short duration bias for two reasons. Sudre explains it is a structural bias since the fund’s added value does not dwell in duration. It does not arbitrate duration curves because the interest rate risk is not a driver of the strategy.

“The sensitivity of the overall portfolio to interest rates currently amounts to 1.7% and we are confident with having a 30% cash bucket.

“Secondly, bonds and spreads have dropped to historic low levels due to the action of central banks. Returns from interest rate risk are not compelling in the current environment.

“We are taking credit risk by investing in high yield and unrated bonds, but we are spreading the risk on the overall portfolio by limiting individual risk weightings to protect our investors’ assets. Our mission is to reinvest when we spot punctual opportunities or in the event of market corrections and interest rate hikes. If the current situation lasts in the bond market, we will only invest 60% to 70% of the fund.”

As of June 2017, financial debt formed 20% of the fund’s allocation, a segment in which the manager invests primarily in subordinated debt.

“We do not apply there a macro view on financials but we rather exploit opportunities in the sector. We stress many in the Tier I and Tier II capital segments as a number of them are losing their eligibility to their respective qualifications,” Sudre explains.

The portfolio manager also looks at convertibles through their credit features, favouring these that are not in the likes of convertible fund managers, such as these with low delta.

“We see there some spots where credit outperformance stands out. A few convertibles like that of German start-up incubator Rocket Internet are difficultly investable for large asset managers whereas being bond pickers, we have no issue to invest,” he argues.

Asked about the ECB corporate purchase program, Sudre observes the purchase of investment grade debt by the institution has crushed margins and spreads to an incredible extent.

“The high yield ‘tourists’ have contributed to lower high yield margins and today high yield returns, all durations mixed, are below 3%. The slowdown of the program would hopefully trigger better risk pricing in the market,” he says.

Sudre estimates the ECB’s program needs an end since Europe’s economy is recovering. He adds he now sees signs of this in France. However, even if the ECB were to announce this September a tapering in 2018, it would not factor in as part of Amiral Gestion’s play via the new strategy.

Sudre reckons that if the normalisation of monetary policies leads to the normalisation of margins and rates, he would have more room to invest, pinpointing that a current burden is to generate enough investment ideas.

This article first appeared in the July/August 2017 issue of InvestmentEurope, available here.