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Ignis Absolute Return Government Bond Fund Quarterly Update with Adam Purzitsky.
Bookmarks:
0|Absolute Return Government Bond Fund
28|Agenda
48|An innovative fund
107|Q2 2013 review
112|Strong Q2 performance
155|Performance attribution
256|US/UK growth
476|US Inflation
578|Japan
649|Outlook & positioning
719|Positioning outlook
Duration:
00:19:29
Recorded Date:
10 July 2013
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Asset TV fund update July 2013 – Helen Farrow and Adam Purzitsky, Ignis Absolute Return Government Bond Fund quarterly update transcript
For professional investors only. Not to be circulated to retail investors.
Please note that this was recorded on 10 July 2013. All opinions and estimates constitute the fund manager’s judgement as of the date of this presentation and are subject to change without notice. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Helen Farrow: Welcome to the Q2 webcast review of the Ignis Absolute Return Government Bond Fund. I'm joined today by Adam Purzitsky, who’s one of the three co-fund managers on the Ignis Absolute Return Government Bond Fund. Adam’s going to spend around the next 15 minutes just talking to you about how we've done over the second quarter. It’s been a very strong quarter for the fund, and he’s going to talk about some of the key positions which have contributed to that strong performance. He’s then going to talk about the current themes which we think are going to be driving the investment markets over the next few months, and then explain how we've positioned the fund to take advantage of those.
Just before I hand over to Adam, I just want to spend a couple of moments just going through some of the design of the fund and what it’s meant to deliver. We wanted the fund to deliver performance regardless of the market environment while targeting a very low level of risk, around 4-6%. One of the key points about the fund is that we aim to identify a range of different trades which we think will generate alpha, rather than relying simply on market beta. The fund can invest only in the highest quality, most liquid debt instruments, so bonds, but the derivatives as well that go with those bonds, and then we also often feel that the best way to express a macro view may be through taking a currency position, we therefore also allow the fund to take up to 25% of its risk in currency. Now I'm going to hand over to Adam, who’s going to take you through the last quarter’s performance.
Adam Purzitsky: Thanks Helen. Well Q2 was actually a very strong one for the fund, it was our best one yet, and that’s following on from a rather difficult Q1, this has got our annualised performance since launch back up to nearly 6%*, which given the 4-5% risk that we’re usually running, this is where we think it ought to be. You can see on the right hand chart there, our risk on a daily basis does tend to change around a lot, we’re quite active in managing the risk, but for the most part we keep it between 4 and 5%, with the occasional dips below 4% when we’re turning over the portfolio and occasionally moving up near 6% when we have particular conviction in what’s, in our view what’s going on in the market**.
The strong Q2 performance was in what to a lot of people was I think difficult market conditions. Now what you're looking at here is a scatter plot of weekly returns of the Absolute Return Government Bond Fund versus the Citigroup G7 Global Bond Index^. Now the reason we’re showing this is to point out that for the first, the blue line with this positive slope is a regression beta fitted to data up until this quarter, and you can see that for most of the beginning two years of the fund’s existence we were structurally long, we were bullish of bonds, structurally long the bond markets, given our view of the global macro economy. And for the most part, this was correct, but even given that we were structurally bullish, you can see that the actual beta that we realised was quite low, very close to zero, but it was slightly positive. However this year, our economic view, one of our key economic calls for the year, and this has been a theme of ours for most of the year, has been for a US led recovery in the developed markets.
So this is not a view of a global recovery where actually we’ve been bearish of Chinese growth all year, but basically our view was that the US, and with perhaps a slight lag the UK, would start to recover, something that recently has started to be borne out in the data. And so you can see that in the second quarter, our regression line fitted just to the second quarter data shows that we've had a slightly negative bias, but again for the most part, the beta is very close to zero on the fund. And averaging the two time periods, you see that over a long time period, the fund would run a zero beta on average.
In the second quarter our performance came from a variety of sources^^. Medium dated forward rates, this was a position we were short of to reflect our view of both a recovering US economy and also the fact that, we believed the Fed would respond appropriately to a recovering economy, and we begin to take on a hawkish bank, which they’ve done, well they’ve been doing it slightly throughout the quarter and in the most recent press conference Ben Bernanke was quite explicitly hawkish, and you could argue he was about as hawkish as he could responsibly be, in that he was given several opportunities to be dovish, to refer to the fact that current inflation is very low, and each time he made quite clear that the Fed believes inflation will come back towards its target on its own, and therefore this does not justify continuing QE. So our short to medium dated forward rates has been a very good performer.
Similarly, our short of US inflation has been a good performer. This of course was when we first put it on a value position, because US inflation was trading, and we put it on in five year inflation, at 2.7%, and actual inflation at the time, CPI inflation, was running at about 1.7%. It’s now even a bit lower, but with the recovering economy and the Fed’s hawkishness, traded US inflation has come down to actually slightly under 2% when we took profits on this position, so again it’s been a very good position for us.
FX active has done very well for us this quarter, this has mostly been due to being short the yen and trading quite well our short of yen, long the dollar. Again, our view of the US economy would naturally lead us to want to be long dollars, and at the same time, our view of Japan. We were quite early in believing in the truth of what Abe was saying about what he wanted to do in Japan, and so we were quite early on being short the yen as well. And so that’s been a good trade for us, but we also traded it quite well, we took profits the first time it reached about 101, we took half of the position off. We covered most of the rest of it as it traded back down through 100, and actually then when it got squeezed back down to 94, as it started to go again with the yen selling off, we got back into the position at about 95, and as I speak now it’s again above 100.
Importantly, long-dated forward rates has been a good performer. Now this, interestingly enough, is a long position, we are not short the long dated, we were not short these rates, we were actually long of them. And the reason for this is again it worked in the portfolio quite well for two reasons. Number one was it was a risk-off hedge, because there’s still plenty of danger in the world, so if something like the European periphery problems or what have you were to flare up again, this would have been a good hedge for us, and it also worked with the Japan view because of course one of the things that the Bank of Japan has tried to encourage is they would like Japanese life insurance companies and other large pools of capital to export some of that capital and invest in foreign assets. They can't intervene in the yen directly, but they clearly would like the yen to be weaker.
And so our view was if this was going to happen, if they were going to be at all successful, a lot of that capital was going to find its way into the longest dated bonds in the UK, in Germany and in the US in particular. And so against our short of the medium dated forwards, we went long the long dated forwards, and again it’s been quite a successful view, and it also worked simply because with Fed hawkishness today, that translates over the longer term into less inflation in the future, and therefore even though you expect the belly of the curve, those yields to rise more than long dated yields, and therefore if the medium dated yields have sold off more than the long dated yields, the longer dated forwards must have rallied. And so again, that was a position that worked quite well for us.
On to our themes, our continuing themes, so the biggest call that we made this year was the US recovery call and associated with that we also believed that the UK would, perhaps with a lag, also begin a proper recovery instead of just the false starts that we've had in the past. And the main way we expressed the US theme was to be short of 5y5y US real yields. This meant we were short the nominal 5y5y forward interest rate, and we were short 5y5y forward inflation in the US. And we put this position on just in the end of last year at about -50 basis point level, so pretty near to the lows, and currently it’s at about 1%, so this has been a very good performing position for us.
And it was a difficult one to hold through some of the first quarter where after very strong data for January and February, US data for March and April, I'm speaking of the payrolls data, was actually quite a bit softer, but we believed in the position and we believed that it would come good, and actually in the most recent payroll release, the soft patch has actually been completely revised out of existence. In the currently released data, there is no soft patch in US payroll growth. March is now estimated above 150,000 jobs and the last three months have all been just under 200,000 jobs a month in the US. So as it turns out, the view was right all along, and it’s come good for us very strongly in the second quarter, along with of course the reaction, the appropriate reaction from the Fed of tightening sooner than was generally believed.
Associated with this of course would be US inflation to fall. We never believed that the US was on its way to an inflation problem, and one of the reasons we were so confident in this is our view of China. This is quite related to our view of China in that, although we believed in a US recovery, the fact of the matter is even though China is slowly appreciating the renminbi, on a day to day basis, it’s still a managed peg, and therefore Chinese inflation is directly related to US inflation. And a Chinese slowdown was therefore going to put downward pressure on US inflation. That, combined with the Fed just doing the responsible thing and easing up as the US economy noticeably improved, implied that US inflation was trading way too rich and should fall. So it was a value position, we put it on at a very high level and it was the first rate to move, and so it was again a very good position for us going into the second quarter. It’s something that when all inflation plays started to come out of the market at once, we did very well out of. I'm sure anybody who’s listening who was long gold will remember the day that this started.
And a final theme is political and regulatory change in Japan. Again this is something that we were somewhat early on in the sense that we were anyway predisposed to believe that this was what was necessary for the Bank of Japan, and we were early to believe that Abe meant to at least attempt what he was claiming, and so we were quite early on shorting the yen against the dollar. Again, it worked with our other views, because being long the dollar was something we were predisposed to, given our view of the US economy. So we were in the long dollar short yen trade from about 77 at dollar yen. We held it right up until the first time it got up to about 101, where we covered about half of it, and then when it started to sell back through 100, as I said before, we covered most of the rest of it, and we got back into the position at a pretty decent level between 95 and 96, and since then it’s come back above 100 again. So again this has been a very successful trade for us and this theme also of being long of long dated forwards in Germany, the UK and the US, this theme has been a particularly successful one for us over the quarter.
So in terms of the current outlook and positioning, our macro themes, we still think that the US recovery has longer to go. We think that the Fed will start its tapering in September. I mean we actually were always more or less on September but I think a lot of the market was, even when tapering was first discussed, was originally on December, but now it’s pretty much come into consensus I think that September is the month. And we actually think that in terms of the US data, there’s possibly still a bit of an acceleration to go, because even with the payroll growth we've seen, you still haven't seen a lot of construction jobs showing up. And given the date on housing sales and on contracts, which tend to lag the closure of sales by a couple of months, it seems likely that there’s going to be a lot of construction jobs added in the second half. I've seen estimates anywhere from 25,000 to 40,000 a month, and so that again would cause a further acceleration in the monthly rate of payroll prints from the US.
Although real forward interest rates in the US have risen, by the standard of anything like a properly functioning US economy, they're still at quite low levels, which is one of the reasons we’re still bullish of the US economy, and so we think that the real forward interest rates in the US have further to go, and then that will translate really into higher real rates for most of the developed world.
The UK we also believe is recovering. Now it’s recovering at a slower pace, but we do believe that it will follow the US into a full recovery. We think Europe will, well we think Europe will continue with the struggle that it’s had for the last several years, and this probably will be our view for I would imagine the foreseeable future. There doesn’t really appear to be an end in sight for them, although stabilisation does appear to have occurred there and that will help along, at least not derail, the recovery in the rest of the developed world, and weaker growth in emerging markets I think is just something that, well we think the world is going to have to get used to. And I don’t think it’s going to derail the US recovery, but it’s just a fact of life, but one thing it does do is because of particularly with the general exchange rate policy going on in the emerging markets, and China’s perhaps the poster child for this, it’s still going to be disinflationary for also the developed world. So even with what the central banks have been doing, even with the large amounts of money printing and balance sheet expansion, the fact of the matter is we don’t believe the world is going to be inflationary any time soon.
Our positioning then reflects these views, of course. So we’re still short of US 5y5y rates, as we still believe they have further to rise. We've actually taken off our short of US inflation and we’re now long spot US inflation, because to support our recovery view and because it actually just sold off too much for us that it became value to go the other way, and we’re long the US dollar still as we think that the Fed tapering and the eventual tightening that the Fed will go through will support the US dollar against the other economies which are lagging in the cycle. Europe remains in I think stagnation is perhaps a better word at this point, but we’re still short French inflation, expecting that to fall because the forward inflation was printing at much higher than actual inflation is running in France, and we've tended to maintain a short euro in large part as a hedge against possibilities of peripheral problems resurfacing, which obviously can happen more or less without notice. So we maintain a short of the euro against sterling throughout.
China in growth recession, again we think this will continue, we think that it’s something that China’s just going to have to get used to. So our original way to express this was to short the Australian dollar, as well as shorting US inflation, which I've talked about before. Now we've actually taken profits on that position a little bit early, as it’s continued to sell off. We had sold at around the 104 level and we’d taken profits at around the 95 level. And the reason we took profits was simply that we worried that the Chinese authorities were essentially going to do something big to try to jump start their economy. It’s interesting that they haven't, and they actually seem to have accepted that growth is just going to be lower there going forward, but anyway we did worry that there would be some sort of large fiscal stimulus or large monetary stimulus that would have popped the Aussie dollar back up, so we took profits on that position somewhat early. And we had a long of 5y5y Australian rates as a bet on their monetary policy, which we've also mostly taken profits on, we have very little of it left on, as the cuts and the projected cuts from the Reserve Bank of Australia have come through.
The political change in Japan of course, short of the JPY is what I've discussed before. We've traded it well but we’re still in it, and the long dated forward rates in the rest of the non Japan developed world, so I mean in the US, the UK and Europe, is one that actually again we've started to take profits on, just into July.
And just some forward rate valuation insight, so basically some relative value trades, so on longer dated UK inflation we’re still short. Against that we’re actually long of short dated UK inflation, and this was a fairly recent trade which went on just at the very end of the quarter, and the reason for this was it was a hedge against Mark Carney as the new Bank of England governor, who had given a lot of lip service to various other ways you might ease in terms of forward guidance and essentially open mouth operations as they're sometimes called, and so we wanted to hedge against what he might say. So we bought, we basically went long short dated UK real rates, which means being long the nominal and long inflation, and actually though it didn’t show up in the second quarter returns because it was already in July, this trade worked a dream because in Carney’s first meeting as MPC governor they did give out a short statement which didn’t say very much but basically preannounced some forward guidance to come, and this was taken as very dovish by the market, and UK short dated inflation rallied very strongly, and the short dated rates also rallied, and so the hedge worked as well as you could imagine and we've already started taking profits on this position.
I guess I should mention in this context then the first week of July in general was a very good week for us, because not only did we have the Carney hedge working very well, but the US payroll data for June, the payroll release for June which came about last Friday was again very strong. That was the one that essentially confirmed our view, because that was the one where the backward revisions essentially wiped the slow period of payroll growth away, out of existence. And so that was a very strong day for all of our positions, because we were positioned for, and especially how Bernanke had teed it up by saying they were going to taper but only if the data came in as strong as they expected, and then this was exactly confirmation that the data so far does appear to be coming in exactly as the Fed expected. So again, it was a very strong start to the third quarter as well.
And so I think that about says it all for us. It was a very good second quarter and it’s been a good start to the third quarter, and I thank you for your time and I look forward to speaking to you again.
This information is intended for professional clients and investment professionals only and should not be relied upon by retail investors.
All information as at 28/06/13, unless otherwise stated.
*Source: Lipper, NAV to NAV, gross income reinvested to 28/06/2013, based on EUR I2 Hdgd share class. The fund launched on 31/03/2011. Benchmark is EONIA: the rate that large banks use to borrow from, and lend to, one another on the overnight market. Performance data does not take account of the commissions and costs incurred on the issue and redemption of shares (including the initial charge).
**Source: Ignis at 28/06/2013. Ex post volatility daily over one month since launch based on EUR I2 Hdgd share class.
^Source: Ignis, Lipper; ARGBF data based on EUR I2 Hdgd share class net, Citigroup G7 data shown in local currency; all information based on weekly data from 01/04/2011 to 28/06/2013.
^^Source: Ignis, internal trading systems, indicative only, base currency, data from 31/03/2013 to 28/06/2013. The fund generates performance by implementing different strategies.
The Euro I2 Hdgd share class is closed to new investors. The Euro I Hdgd share class was launched on 02/01/13 and has limited past performance.
Past performance is not a guide to future performance.
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.
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.
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 a Recognised Scheme in the UK under Section 264 of the Financial Services & Markets Act 2000 and is promoted in the UK accordingly. 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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