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Ignis Absolute Return Government Bond Fund - Q3 2013 Review with Helen Farrow and Adam Purzitsky.
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0|Absolute Return Government Bond Fund
17|Agenda
28|An innovative fund
72|Performance & risk
97|Performance attribution
278|Risk bucket
426|Positioning & outlook
Duration:
00:13:48
Recorded Date:
17 October 2013
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Transcript:
HELEN FARROW: Welcome to the third quarter webcast for the Ignis Absolute Return Government Bond Fund. I'm going to do a very quick update on the fund and on its recent performance before I hand over to Adam, who is going to review the key positions in the third quarter and explain our current view.
Before I do that just a very quick recap on the fund itself. It’s a genuine absolute return fund, which means that it’s designed to deliver positive performance in all market conditions, while targeting a low level of volatility. We aim to achieve this by investing in only the highest quality, most liquid government bond markets, typically the US, the UK and Germany, and we believe that we can generate superior returns, because we have a different way of looking at rates markets and because we control downside very actively by our rigorous risk management. The evidence of this can be seen most clearly by looking at the information ratio which we have achieved of 1.85.
ADAM PURZITSKY: Okay, thank you Helen. So it’s been another good quarter, we returned 2.6%, bringing our year-to-date return to 4.6%. As you can see on the right hand chart, the risk that we ran was as usual right in the middle of our target volatility band; we averaged about 5% risk; and as usual the realised volatility was somewhat below the expected measurements.
Looking over to the next slide, we can have a look at the key contributors to performance. So, as has been the case through the last couple of quarters of good performance, medium-dated forward rates have been a key performance driver, because they’ve been most sensitive to the economic view that we've been positioning for and that has thus far been coming good for us.
As the summer moved along, so following on the second quarter performance after the Fed’s June press conference, 5-year 5-year rates continued to sell off through most of the third quarter. Further to that, our UK view finally started to come good. There was a rush of very strong UK data. Which we were actually well positioned for because we had started to move some of our short in 5-year 5-year out of the treasury curve and into the gilt curve, since through the first part of the summer the gilts that actually lagged slightly in the selloff, you know, for the simple reason that at that time UK data was still lagging US data.
Furthermore, we went long on long-dated forwards from the UK. There were several reasons for this. It worked with our Japanese view, as I spoke about in the last webcast, but it also provided a hedge to our short of the belly. And given our view of Mark Carney and the Bank of England, it also worked well with that. Because while there seemed to be a view in the market that the Bank of England was going to give excessively dovish forward guidance, our view was that it would be something closer to the Fed’s, a more reasonably balanced guidance between balancing the need to keep rates low but also to prevent long-term inflation expectations from getting out of hand, and that’s actually what they delivered come August for their first actual fully fledged forward guidance.
So we were well positioned for that, both by being short UK inflation, by being long of long-dated UK rates and by being short of the 5-year 5-year rates in the UK, and even a bit short at the shorter end of the UK. So in some sense we were almost perfectly positioned for the August Bank of England, which just allowed us to continue the good performance following on from the Fed. Then, as we got into the end of the summer, so the end of August, we actually, largely because of simply the valuations, the 5-year 5-year interest rates in the US got to a level which frankly we thought was high enough, we actually saw value in being long of it, and so we reversed the position and actually bought that rate.
But furthermore, another motivation for doing this right at this time was as we went into the September Fed meeting, there was a general expectation that the Fed would begin their tapering there, and we were not so sure. You know, we actually did think that they would likely taper, but we didn’t think it was, we thought that from the Fed’s point of view, it wouldn’t make that much of a difference between a September or a December tapering. But since it was anyway fully priced in the market, we thought actually that it was better to hedge against them not doing it, so we actually went along with that rate, which also ex-post looks like a decent trade for us.
On slide 6, you can actually see the time path of that 5-year 5-year position, both in the UK and the US. We entered the position in around October 2012, when it was at very low levels, negative levels, and it had gradually been rising the entire time since. But of course beginning with the June press conference from the Fed and then similarly with the BoE’s relative hawkishness, again relative to expectations, that rate went all the way up to again a level that we thought was nearing fair value. So that combined with our view of the Fed’s September meeting caused us to reverse the position and actually be long of that rate at the beginning of September.
Slide 7 gives an indication of the changes in the UK forward curve over the quarter. So again, as I was describing, at the beginning of the quarter when Mark Carney first became Governor, there was a general perception that his mandate was to be extremely dovish and a general expectation in the market that the forward guidance coming out of the UK would be somewhat unbalanced on the stimulus side. But I think a combination of the fact that simply the MPC in general is much more reasonable and a bit less dramatic than all that, combined with the fact that we had a very good run in UK data in the interim period, something that we were anyway positioned for, the actual guidance that came out of the BoE in August was reasonable and balanced and relatively speaking quite hawkish.
Carney’s speeches around that were also quite hawkish, in that he went out of his way to make clear that he took seriously the inflation knockouts in the guidance, and even to the point of explicitly reminding us that when he was the Governor of the Bank of Canada he had made a similar forward guidance promise there with an inflation knockout and he had exercised the knockout, and he went out of his way to say this in a speech about two days after the inflation report.
So these things together were things that again we were actually quite well positioned for, both being long at the very long end of UK, being short UK inflation and being short of the nominal curve at the 5-year 5-year part, which was the part of the curve that would sell off the most in a relatively hawkish Bank of England. So again this was a successful trade for us in almost all parts of the curve.
Slide 8 gives a look at our current positioning and outlook. So, as I speak, the US Congress has finally yesterday decided that they weren't going to blow up the entire US economy. So this basically leaves us free to move back to what we think will be the path going forward into 2014 and, you know, had Congress not gotten in the way for three weeks, what we would have been positioning for the whole time. It’s our general view is that 2014 will bring continued improvement, both to the US and the UK. Now to be clear, we’re not talking about a return to the sort of 1990s growth rates, where the US drives the entire world, but we think real growth will be there, unemployment will continue to fall. But we actually think it’s still at the world level.
It’s still a low nominal growth world. There’s still a lot of savings coming out of emerging markets, there’s still depressing real interest rates, keeping the expected returns of assets low. So we don’t see the world as a high nominal growth world, but we see the US and the UK, and we just don’t see it as dramatic as all that, we see the US and the UK gradually moving to full employment and gradually normalising their policy rates, and therefore having their forward yield curves normalise. So to express that view we've moved our short in both the US and the UK down to a shorter part of the curve.
So now to the 3-year rate two years forward, because at the next instance when we sort of have finished with the tapering talk and it’s all well and done for, the next thing to move will be that part of the curve as we start to at least talk about when will be the first actual policy rate hike. And the advantage of doing things in forward rates I think is by shorting the 3-year 2-year. We don’t really need to take a stand on exactly which month is going to be the hike, so we don’t need to figure out which quarter it will be and trade a short sterling or a euro/dollar future, we can just understand that when that hike gets priced in, 3-year 2-year should rise.
Against that we've now actually gone long of the 5-year 5-year rates in the US and the UK. We did this again largely for valuation reasons. That was the real reason we did it, but it also worked for other reasons, like hedging and no taper decision, which is what we got. And it was a risk-off hedge, which we would have thought would have been a good hedge had bad things happened in the US with the congressional problems. And we’re still looking positioned for the US dollar and sterling to strengthen.
In terms of our other positions, the growth recession in emerging economies, which is theme four on this chart, is still one we believe in. So we believe this will still keep global inflationary pressures low, as at the end of the day this is still a very high savings part of the world and they're still exporting some of their savings. Our bearishness on headline growth in China still leads us to want to express weakness in the Australian dollar, and we've gone long of Australian dollar interest rates on what we expect will be a weakening Australian economy.
Again, this is something that it’s important to understand that in any event, whichever way the Chinese economy goes, even if they successfully transition to a more service-based consumption-led economy, which is a good outcome for China, it doesn’t much matter. Either way that’s good for our Australia view because a service-based economy doesn’t need as much iron ore as the investment-led economy that China’s been running for the last 15 years.
Finally, we still have a bias to be short of the Japanese yen. For the simple reason that it’s quite clear right now that the Bank of Japan hasn’t quite done enough to get 2% inflation. They’ve made a lot of progress, I mean we actually approve of what they’ve done so far, but it’s clear that they haven't done enough. And so if you ask yourself the simple question is the current value of the yen consistent with 2% inflation in Japan, I think the answer has to be no. The last time Japan had 2% inflation the yen was at 140, as I think I said on the last webcast. So again, we’re still biased, we’re trading this position quite actively, but our bias is still to look to short JPY when we get opportunities to do so.
In terms of the Eurozone, you know, we still don’t see a big growth rebound. We see low inflation continuing there. So we are still short of 5-year 5-year French inflation. We’re still positioned for, you know, short the euro as a hedge to sort of the big problems in the periphery resurfacing, because that can come at any time without a lot of warning. And finally sort of to bridge the gap in the interim between sort of where we are now and where we hope to be next July, where we might have a lot of volatility but basically a range trade, we sold volatility in the US 5-year 5-year.
This was both a value trade, the volatility at the time we sold them had got quite high, and it also works as a bit of a hedge because in the events where the Fed doesn’t taper, if we turn out to be wrong on that, we still expect it to come in December or January, but in the event that it doesn’t happen, they’ll be pushing down and reducing the realised vol of this position, so we’ll earn a nice carry from it. And we've been short of European 5-year 5-year rates against our long in the US and the UK, because they have lagged us a lot. So while we saw value in the US and the UK, we still expect the European curve to eventually move up to meet the US and the UK, because in an open capital market at some point the real interest rates across the open trading world are going to equalise themselves.
And these are all positions that as we come out of the congressional mess, as it were, and back into talking about fundamentals and talking about the Fed we again think that these are all going to be good trades. We think the Fed will be looking to taper in December or January, because the lack of taper was largely an insurance policy against Congress, and now that that appears not to be needed, they’ll look forward, and in the absence of a fiscal drag going forward, they're probably going to have a similarly bullish view of the US economy. They more or less said this in the September minutes in fact.
So that’s how we stand, and that’s how we see it going forward, and we think we’re pretty well positioned to do well over the first half of 2014. And thank you very much for your time.
This information is intended for professional clients and investment professionals only and should not be relied upon by retail investors.
The opinions expressed here represent the views of the fund manager at the time of preparation and should not be interpreted as investment advice.
Distribution of this document and the offering of shares in certain jurisdictions may be restricted by law and accordingly persons into whose possession this document comes are required to inform themselves about and to observe such restrictions. This document does not constitute an offer or solicitation to anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such offer or solicitation.
Further detailed information regarding the Fund, its Prospectus, its Key Investor Information Document (KIID), its latest annual reports and any subsequent half-yearly reports (including information on how to switch, buy and sell units of the Fund and other unit classes available), is available free of charge from Ignis Investment Services Ltd. You can also obtain these documents through our website www.ignisasset.com/international.
Past performance is not a guide to future performance. The absolute return nature of the strategy means it is targeting positive returns, but this is not a guarantee and investors may not get back the original capital invested.
The fund takes long and short positions based on the fund manager’s views of the market direction. This means the fund’s performance is unlikely to track the performance of broader bond and equity markets. While this creates the opportunity for the fund to deliver positive returns in falling markets, it also means that the fund could deliver negative returns in rising markets. The value of investments and any income from them can fall as well as rise and is not guaranteed. Exchange rate movements may cause the value of investments to fluctuate. Please note the Euro I2 share class is closed to new investors.
The fund is a sub fund of Ignis Global Funds SICAV, an investment company organised under the laws of the Grand Duchy of Luxembourg as a Self Managed SICAV. The investment company has its registered office at Vertigo-Polaris, 2-4 Eugene Ruppert, L-2453 Luxembourg, and is authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg.
The sub fund is currently registered for public distribution in the following countries: Luxembourg, UK, Spain, Germany, Austria, France, Netherlands, Belgium, Sweden, Switzerland, Finland and Italy. Copies of all relevant scheme documentation can be obtained free of charge from the locally appointed paying agents. Austrian Paying Agent: Unicredit Bank Austria, 8398 Global Securities Sales & Services, P.O. Box 35, A-1011 Vienna; Belgium Paying Agent: Fastnet Belgium SA, B-1000 Brussels, Avenue de Port 86C, b320; French Paying Agent: Société Générale SA, 29 Boulevard Haussmann, F-75009 Paris; German Information Agent: Société Générale SA, Neue MainzerStraße 46-50, D-60311 Frankfurt / Main; Italian Paying Agent: RBC Dexia, via Vittor Pisano 26, 20124 Milan; Luxembourg Paying Agent: Société Générale, 11 Avenue Emile Reuter, L-2420 Luxembourg; Netherlands Paying Agent: ING Bank NV, Van Heenvlietlaan 220, Location Code BV.06.01, NL-1083 CN Amsterdam; Spanish Paying Agent: RBC Dexia Investor Services España SA, calle Fernando El Santo no20, Madrid 28010; Swedish Paying Agent: SEB Merchant Banking, Sergels Torg 2, SE-106 40 Stockholm; Swiss Paying Agent: NPB Neue Privat Bank AG, Limmatquai 1, P.O. Box, CH-8022 Zurich.
This document has been issued by Ignis Investment Services on behalf of Ignis Global Funds SICAV. Ignis Investment Services is registered in Scotland Number SC101825. Registered Office: 50 Bothwell Street, Glasgow G2 6HR. Authorised and regulated by the Financial Conduct Authority.
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