Bonds. Advanced Fixed Income: designed to profit from market inefficiencies under risk constraints

Transcription

1 Bonds Advanced Fixed Income: designed to profit from market inefficiencies under risk constraints 24

2 UPDATE III/2015 BONDS AUTHORS: MAXENCE MORMÈDE & YANN NETO The historically low-yield environment challenges investors expectations for positive returns in most fixed income asset classes. After several years of loose monetary policy, investors wanting to compensate for this lack of returns may choose to either reposition their portfolios, to broaden their investment universe, or both. 25

3 Risk is more strongly penalised in bad periods than it is rewarded in good ones. However, in a context of low yields, the traditional dilemma between risk and return is exacerbated, as those risks are less rewarded on an absolute basis than in previous cycles. For institutional investors in particular, who need to meet their asset liability objectives, the ability to generate a stable outperformance whilst taking those risks into account is paramount given the length of the current low yield cycle. Advanced Fixed Income is Allianz Global Investors solution for global risk constrained investors in fixed income markets. Where most asset managers try to maximise the mere performance of investments, Advanced Fixed Income aims to optimise the risk-adjusted performance of our investors portfolios. Advanced Fixed Income is a highly differentiated strategy designed to identify and exploit market inefficiencies in global fixed income markets. Fixed income markets display inefficiencies that can be systematically exploited to the advantage of our investors. Our first objective is to generate long-term value measured in terms of performance against the investor s benchmark. The outperformance is achieved through carefully selected active positions, deeply rooted in our research approaches. Our research is structured in a way that enables us to simultaneously offer a broad coverage and deep insights: we call it Advanced Analytics. Markets are asymmetric: risk is more strongly penalised in bad periods than it is rewarded in good ones. Therefore our portfolio construction is based on stringent risk guidelines, and aims to avoid credit deterioration, which is achieved by a systematic optimisation process. The Advanced Fixed Income strategy follows a smart, active and disciplined management style to deliver superior risk-adjusted returns through a fourstep investment process (see Chart 1 ). 26

4 UPDATE III/2015 BONDS 01 THE ADVANCED FIXED INCOME PROCESS IN FOUR STEPS 1. Research 2. Market Analysis 3. Portfolio Construction According To Individual Investor Requirements 4. Trading State of the art methods for non-conventional market analysis Active Positioning Process Monetary Policy Yield Curve Duration Volatility Currencies Emerging Countries Covered Bonds Bank Bonds Corporate Bonds High Yield Bonds Inflation-linked Bonds Swaps Active Management 1. Universe Analysis Risk Decomposition Liquidity Analysis 2. Funds Positioning Allocation Safe Spreads Tactical Allocation Selection Security Selection Primary Markets Risk Management TE / VaR DVaR / CVaR*, ** Risk Optimisation Expert Implementation Best-Execution Insights Monthly Positioning Documentation for PM*** Integration of active strategies & risk requirements Investor s optimised portfolio * TE: Tracking Error, VaR: Value at Risk, DVaR: Dynamic VaR, CVaR: Conditional VaR. ** Benchmark & risk constraints are determined by the investor / ALM Manager. *** PM = Portfolio Manager. Risk Controlling Step 1: Research Our first goal is to gain an information advantage by developing an in-depth understanding of the risks embedded in a security. For the Advanced Fixed Income strategy, the primary source of research is Allianz Global Investors Advanced Analytics. The tool is based on advanced proprietary quantitative models, which allow us to understand the complex relationships between numerous economic variables and enables us to reduce the complexity of these relationships in order to make them more palatable and concrete. We recognise that classic quantitative approaches can be poor in predicting structural breaks in economic relationships, especially during severe crises. This is due to the fact that many models try to capture the factors that were particularly good at explaining past events and, therefore, ignore indicators that may be relevant for future crises. Our response to this shortcoming is to take a different view on the markets, and constantly challenge what we observe by innovative models. Using Advanced Analytics, we consider (see Chart 2 ): Global sovereign bonds: with our proprietary research, we analyse the ability, and the willingness to pay, of 80 sovereign issuers. Global covered bonds: our research covers the legal framework, macroeconomic environment, standalone issuer strength and covered pool quality of covered bonds issuers worldwide. Global corporate bonds of financials and non-financials: we systematically analyse the fundamental strength of global corporate issuers to obtain risk-clustered classes of corporate bonds. This feeds into our Rich/Cheap Analysis tool, which measures the attractiveness of individual bonds along the yield curve. Global Securitised: we cover over 1,000 transactions of securitised issuance, including ABS/MBS in Europe and the US. 27

5 Step 2: Market analysis By active positioning, we translate the findings of our research into actionable investment ideas. We consider both systemic risk and specific asset class risk when deciding on positions to take. Systemic risks, for example, are those related to monetary policy of developed countries which may affect short-term interest rates, the shape of yield curves, market volatility and currency movements, and which have an impact on emerging bond markets. Specific asset class risks relate to market segments: covered bonds for collateralisation risk, banking sector bonds for financing risk, corporate bonds investment grade and high yield for credit risk, inflation-linked bonds for break-even risk, or swaps for funding risk. Our positioning methodology has evolved over time. In particular, we believe our positioning needs to reflect the fact that yield curves can be very different, both between and within regions. Therefore, we take a granular approach to duration management, and provide a positioning for each maturity bucket within each country. In doing so, we define partial duration bets that sum up to the total duration of the portfolio. The second important objective of our positioning process is diversification. Since diversification of active positions stabilises the long-term expected information ratio, we may use nonbenchmark assets to add value and stability to the strategy. Step 3: Portfolio Construction Portfolio construction starts with the detailed analysis of each investor s benchmark across its different risk dimensions such as duration, curve exposure, explicit country allocation, implicit country allocation (e. g. in the collateral pool exposure of covered bonds), rating structure, industry classification exposure for corporate bonds, etc. We also analyse the liquidity of the benchmark itself. This comprehensive analysis allows us to develop a detailed understanding of the risks associated with each investor s benchmark, and provides a foundation from which we can seek to add value. Based on this analysis, we overlay the benchmark with tactical positions to provide a customised active portfolio, taking into consideration an investor s specific investment guidelines and risk constraints. We are convinced that our ability to accommodate a wide range of investor constraints, such as duration, credit and specific exclusion criteria, is a key strength of our approach. Risk optimisation forms a vital part of portfolio construction. We use a quantitative process to extract the maximum performance for each element of risk. Typically, risk is expressed in terms of contributions to tracking error of the different market segments (country, maturity bucket, sector). However, given the flexibility of our process, we are able to construct portfolios against any risk measure, including tracking error, Value at Risk, Conditional Value at Risk or Maximum Drawdown. 28

6 UPDATE III/2015 BONDS 29

7 02 ADVANCED FIXED INCOME GLOBAL REACH FOR INDIVIDUALISED SOLUTIONS Advanced Analytics Single Framework Global Coverage 80 countries under sovereign risk analysis 101 SSA issuers (Supranationals, Sub-sovereign & Agencies) 400 approx. investment-grade non-financial corporate issuers 30 non-investment-grade issuers 33 insurance companies 190 banking institutions 220 cover pools 1000 approx. securitised transactions (ABS/MBS) One target: an internal credit opinion for all global asset classes This map represents the countries covered under the sovereign risk analysis. AFI offers a truly global coverage across 30

8 UPDATE III/2015 BONDS Advanced FI Portfolio Management Single Approach Polymorphic Strategies Absolute Return: target return defined as EONIA/LIBOR + xx bps Buy & Watch (B&W) Enhanced Fixed Income (EFI): lower tracking-error strategy Advanced Fixed Income (AFI): higher tracking-error strategy Strategy Absolute Return B&W EFI AFI Region Euro US Global Euro US Global Euro US Global Euro US Global Universe Aggregate Sovereign Covered/ Securitised IG Corporates Emerging Markets all asset classes and market segments. 31

9 For actual security selection, we draw primarily on our in-house fundamental and quantitative analysis resources to determine a theoretical fair value for each security. To do this, we use our Rich/Cheap Analysis tool, which measures the attractiveness of individual bonds across the yield curve. Based on this analysis, we aim to determine for a given maturity segment which bonds are more attractive and should be bought, and which are less attractive and should be sold. The additional expected return lies between five and 20 basis points per annum, depending on market conditions. We also seek to capture primary market premia by participating in IPOs. Step 4: Trading Trades are executed by our Fixed Income Trading Desk in Frankfurt. Our traders work with local and regional brokers, and are specialists within their region. They have developed deep insights to better understand the overall market conditions and regulatory environment, as well as sector and country-specific movements of securities in their local markets. As a result, traders are able to utilise their regional expertise to provide better market insight to portfolio managers, and improved execution quality for our investors. This expertise is particularly critical for less liquid asset classes where substitutes may sometimes be needed. A Strategy with Tradition The roots of the Advanced Fixed Income strategy can be traced back to 1999, with the inception of Enhanced Fixed Income portfolios. The philosophy and process supporting this strategy were enhanced to develop the Advanced Fixed Income strategy, which was launched in 2008 to capitalise on changes in the regulatory framework, and Allianz Global Investors strengths in sovereign and credit analysis. As of May 2015, the Advanced Fixed Income team consists of 16 portfolio managers, with an average investment experience of 12 years. The team is headed by Maxence Mormède, Chief Investment Officer (CIO) Advanced Fixed Income who, while 32

10 UPDATE III/2015 BONDS Maxence Mormède is Chief Investment Officer (CIO) Advanced Fixed Income by Allianz Global Investors. He joined the group in 1999, with responsibility for research and fund management within the Portfolio Management Quantitative Products department. He specialised in Fixed Income and Guaranteed products. In 2003 Maxence was named Head of the Multi-Asset Protection Team. In 2011 he founded the Advanced Fixed Income Team in Frankfurt, which offers a broad spectrum of investment solutions in global sovereign, covered and corporate debt and currencies for institutional and retail investors. Maxence studied Mathematics, Business and Economics in Toulouse, Paris, Oxford and Berlin, and gained the Diplôme de Grande Ecole de l ESCP Europe, a Master s in Management, the Diplom-Kaufmann, as well as the Diplôme d Etudes Approfondies in Mathematical Economics and Econometrics. He is also a CFA Charterholder. portfolios are managed on a team basis, is ultimately responsible for the management of all accounts under his supervision. The investment professionals in this team are both portfolio managers and research analysts. Continuous research and development effort ensures that we stay at the forefront of value generation and risk management. The team has a depth of proven investment and quantitative modelling experience, and extensive complementary skills including fixed income, currency, risk management, quantitative research, fiduciary management and capital protection. Since inception, the strategy has delivered superior risk-adjusted performance in all fixed income asset classes. It has invested in and generated outperformance in 14 of the last 15 years for our investors, across various market cycles. Advanced Fixed Income is our solution for global risk constrained investors in fixed income markets. Yann Neto is the product specialist of the Advanced Fixed Income Team. He joined Allianz Global Investors in June Yann started his career in Credit Trading in 1999 as a market marker in the Financials Credit trading team at Natixis in Frankfurt, and was in charge of pricing and managing risk on all fixed income instruments. He then joined Mitsubishi UFJ securities Intl Plc in London as a proprietary trader in 2004 with the responsibility for Euro-denominated fixed income bonds, and covering multi-currency relative value trading portfolios. Yann also has experience in bond broking at Icap, London and BGC, Paris. Yann also holds a Master s degree from Université Paris X in Money, Bank and Finance with honours. 33