Fixed Income Boutique

Pie in your face or cake and candles?

| Read | 7 min

Cake, everyone loves cake and anniversaries are a great reason to have a slice or several. This October, we got to blow out two candles on a tasty strawberry and cream cake to celebrate the second anniversary of our Vontobel Fund - Global Corporate Bond Mid Yield. For bond investors although the past two years have had plenty of sweet moments, some of them have been less cake and more of the pie-in-the-face variety. So, let’s take a quick look at how we avoided getting pied by the markets and how we aim to keep our faces clean in the future also.

In a world of fast and short news cycles, it’s easy to quickly forget how a nerve-racking event felt like when you were slap bang in the middle of it. In hindsight, 2016 was a year of one test of bond investors’ nerves after another:

  • The EU banking crisis, for a short moment, had investors wondering if we were at another Lehman moment
  • The Brexit referendum and the possible breakup of the EU
  • Fears around China’s growth caused shockwaves across financial markets
  • Oil prices took a dive, affecting energy bonds
  • Mr. Trump’s election victory caused a short, sharp shock to bond prices

Getting emotional

All of the above mentioned events, at the time, forced investors into an inner turmoil of emotions versus investment process. In our Global Corporate Mid Yield fund, we took the decision to stick to our process. While this may sound “brave”, it had very little to do with courage, we were, I’m sure, as fearful as everyone else. However, our reasons were purely pragmatic. When faced with a challenging investment environment the only things we can attempt to control are our emotions and our investment process. We are first and foremost credit managers so we dealt with the fear by concentrating on fundamental credit analysis and reviewing our exposures one-by-one to decide if our positions were sound from a credit-quality perspective. We then executed our decisions based on our findings:

  • During the European financial crisis we held onto (and even increased) exposure to banks via Alternate Tier 1s (AT1s) as we were convinced it was a good buying opportunity
  • As Brexit news hit the screens, we kept our UK overweight as we were convinced that the UK economy was robust and chances for a “Soft Brexit” were high
  • When the US election results came in we increased exposure to US banks and US energy firms as those industries were expected to benefit most from the planned Trump agenda

Why we like to be global and you should too

The strength in choosing a global investment universe is the diversification and flexibility that it provides through a wide range of opportunities. This (again) was proven with the Brexit vote in 2016 which had a less severe effect on credit spreads than for example for a pure UK portfolio.

Chart 1: Spread widening post-Brexit (%)


Source: Barclays Indices, OAS level change three days after Brexit referendum.

The broader liquidity of global bonds is usually better than in a pure regional portfolio. To give a real-life example of this, let’s forget the cake for a moment and look at something of a more liquid variety: The bonds issued by the world’s largest brewer Anheuser Busch following the acquisition of beer rival Sab Miller. We were not involved in Anheuser bonds at this stage and saw, at first, credit metrics deteriorating following the acquisition. However, Anheuser gave a strong commitment to not only remain in investment-grade territory, but also to de-leverage over time with a clear leverage target. We took a closer look at the pro-forma results of the combined entity, spoke with the treasury department of Anheuser and became convinced that the new bonds would present a good investment opportunity. Out of the many possible bonds, we subscribed to a 10-year bond which finally had an issue size of 11 billion US dollars for this one bond only (!).  This was one of the largest corporate bond issues in history and is still today one of the most liquid corporate bonds globally – important in terms of risk management of the portfolio.

To be able to capture all of the value in corporate credit, we also strongly believe that investors should think about global credit through a multi-sector approach. This includes investment-grade credits from developed countries, some emerging-market hard-currency and also high-quality, high-yield bonds (“rising stars” - typically with the potential to be upgraded). As a result, the Global Corporate Mid Yield fund can be seen as a “best-of-collection” from areas such as European, US and emerging-market credit, high-yield bonds and interesting relative-value opportunities in different currencies.

Escape from the low-yield environment

So, how has our investment approach played out for our clients? An investment in global credit should be seen from a mid-to-long term perspective as credit is a core asset class for many investors. Since launch, the fund has returned close to 13% (cumulative, G share class, in USD), outperforming the standard market reference index by about 2% and ranks among the top global corporate bond funds in the Morningstar peer group. This was achieved without taking excessive risks in the portfolio.

Therefore, I would like to thank our investors, who have trusted us to deliver value and helped the fund grow.

Chart 2: Performance figures
Net returns p.a. %


Vontobel Fund – Global Corporate Bond Mid Yield, G share class, in USD

Performance data (since inception)

Sharpe ratio:        1.61
Beta:                      1.00
Jensen's alpha:    0.71
Information ratio: 0.77

Source: Vontobel Asset Management. Period: 01.11.2015-31.10.2017. Inception date: 29.10.2015. Benchmark: The BofA Merrill Lynch Global Corp Index hedged into USD since October 2016; from inception to September 2016: The BofA Merrill Lynch A-BBB Global Corporate Bond Index hedged into USD. Past performance is not a guide to current or future performance. The performance data do not take account of the commissions and costs incurred on issue and redemption. The return of the fund can be a result of currency fluctuations rise or fall.

When we launched the fund, we were convinced that global credit as an asset class offers high growth potential. This is evident when looking at the relevant peer group, which shows a compounded annual growth rate of more than 40% for the last 10 years. This trend is confirmed also when looking at the massive flows that enter global credit (US dollar denominated bonds in particular) (for more info see also our Viewpoints publication dated June 8, 2017). Through the first two years, we often met clients that started to look at global credit for the first time as in their traditional home market, the low-yield environment did not satisfy their needs. We strongly believe that global credit is one of the “solutions” to escape low yields, also for the years to come.

Chart 3: Growth Assets under Management Global Corporate Bond Peer Group (Morningstar)


Source: Broadridge, Vontobel Asset Management as of 31.08.2017.

Looking ahead

Well, that’s the view from the rear-view mirror taken care of. So let’s set our sights now on what lies ahead, as that’s where going. We will continue with our approach of trend anticipation, value focus and credit selection. In particular, I see three themes driving the fund going forward:

  1. Global banks. As a bank analyst since 2002, one of the defining moments in my career was the US financial crisis. Since then, banks have changed a great deal (underlying balance sheet strength, improving asset quality and regulatory tailwind) and we continue to see value, particularly within bank capital securities. This is also why we kept our exposure during periods of turmoil resulting in value for our investors.
  2. Relative-value trades. This multi-currency investment universe has the advantage of offering cross-currency investments that single-currency portfolios cannot. If we like an issuer, we strive to optimize the value for our investors with the currency risk fully hedged. This a good way to extract value.
  3. Emerging-market hard-currency debt. Emerging-market investments are in high demand. We choose the most attractive names, leaning on the expertise of our emerging-market experts in the Fixed Income Boutique. We increased exposure in 2017 as some risks disappeared following the first months after Mr. Trump took office (such as border adjustment tax). Specifically, we still like the relative high carry of selective emerging-market credits versus companies from the developed markets. For example, we have played the recovery of Latin American credit, with Brazil in particular.

As the fund enters its third year, we will continue with these “themes” we implemented in the fund. Currently, we are more advanced in the credit cycle, and we will focus even more on our research capabilities to be very selective with our credit investments. We have consistently communicated to  investors our belief that global rates will not rise sharply and any increase will be moderate. As a result, global credit remains an interesting area with an attractive carry. We will strive to keep the portfolio at attractive levels: the yield to maturity of the fund was in the range of 3.0 to 3.5% over the last two years, whereas the reference index yield dropped below 2.5%. This was achieved without compromising on credit quality: the average rating of the fund was stable on BBB level over the period.

How to globalize your bond portfolio

If you would like to hear more about our thoughts on global credit markets please subscribe to our monthly market comments, regular viewpoints and do not hesitate to contact us for meetings (we can bring cake). We firmly believe an active, multi-sector approach to credit investing results in better long-term performance via thorough fundamental credit analysis, structural diversification and exploiting relative-value opportunities among issuers.

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