Seizing opportunities in global fixed income markets

What is the objective of the strategy?

The objective of the strategy is twofold: to provide investors with exposure to global fixed income markets, while prioritizing downside protection. Our overarching aim is to deliver an asymmetric return profile, enabling investors to capitalize on bond market upturns while seeking to safeguard against downturns. We aim to generate returns surpassing those of cash investments.

Additionally, over the long term, we target returns above a global aggregate benchmark, yet with lower volatility than that of the benchmark. Furthermore, we endeavour to maintain an average ESG (Environmental, Social, and Governance) profile significantly above that of the markets in which we operate. We track this through two key performance indicators: the average ESG score and carbon footprint of the portfolio.

Why include a Total Return strategy within the fixed income allocation of a portfolio?

Choosing a Total Return strategy as part of the fixed income allocation of a portfolio may offer significant benefits. While this strategy typically maintains a positive correlation with bond markets over the long term, it also provides the flexibility to temporarily decouple from market trends. This adaptability enables us to exploit a wide array of opportunities across the full spectrum of bond markets, allowing for effective navigation of diverse market environments.

Traditional bond benchmarks are ‘flawed’ in that they may exhibit biases towards certain issuers, giving a higher weight to those with higher debt levels. The Total Return strategy adopts a fully unconstrained and benchmark-agnostic investment approach. By doing so, we can pursue opportunities based on their merit rather than being influenced by benchmark compositions. This approach seeks to ensure that our investment decisions are driven solely by the potential for returns and risk management considerations.

Can you explain how a flexible approach helps outperformance?

A flexible approach to fixed income investing can lead to outperformance by leveraging the diverse sources of returns available within the market. Unlike many other asset classes, fixed income instruments offer opportunities for returns from multiple sources, including interest rates, credit risk premiums, inflation expectations, currency movements, and even equity sensitivity through instruments like convertible bonds. This diversity means that there is almost always at least one return driver capable of delivering positive performance in any given market environment.

In the current post-QE (Quantitative Easing[1]) and post zero-interest-rate landscape, we see dispersion between issuers and segments as offering ample opportunities to generate returns. This means that a flexible approach, which allows for dynamic allocation across these various return sources, may capitalize on market opportunities more effectively. By adapting to changing market conditions and selectively targeting areas of opportunity, a flexible strategy may enhance the potential for outperformance over time.

How do you aim to add value within the strategy?

We aim to enhance performance through a combination of four key performance sources: credit, rates, currencies, and equity sensitivity. We employ three types of trades to achieve this: directional trades, relative value trades, and bottom-up selection.

Directional trades involve taking outright positions based on our convictions about the movement of key interest rates or other market factors such as the widening or compression of credit spreads.

Relative value trades capitalize on perceived disparities in the valuation of two markets, such as currencies of similar countries (for example Sweden and Norway or Australia and New Zealand). These trades are executed in a risk-controlled manner and may offer opportunities to enhance performance.

Bottom-up selection entails selecting individual securities based on their intrinsic value, even in situations where the overall market sentiment is negative. For example, our strategy might involve holding cash bonds from high-yield issuers while simultaneously hedging against broader high-yield market risks through credit default swap indices.

By leveraging these strategies, we seek to consistently add value across various market conditions while effectively managing risk.

What distinguishes your strategy and what are its core strengths?

Our key strengths lie in our dynamic and forward-looking risk management approach, as well as the robust expertise within the wider fixed income team at Candriam. We take pride in our healthy scepticism of purely quantitative models that rely heavily on historical correlations between return drivers, recognizing their limitations in anticipating paradigm shifts that can render such relationships obsolete. Instead, our deep fundamental analysis of rates, currencies, and credit markets enables us to adapt effectively to changing market environments, particularly in recent years marked by significant shifts in correlations.

Furthermore, our fundamental, bottom-up analysis conducted by our credit (investment grade, high yield), and emerging debt teams is a significant asset. Their long-standing track record empowers us to construct the portfolio with high-conviction sub-portfolios rather than relying solely on indexed instruments.

Additionally, our strategy seeks to offer a robust ESG profile, with extensive issuer exclusions in place. This illustrates our dedication to incorporating ESG principles into our investment process, thereby facilitating a comprehensive assessment of a company or country's debt repayment capability and aiding in the avoidance of unfavourable surprises. We believe that our strategy showcases the compatibility of substantial ESG ambitions with achieving total return bond solutions, reinforcing our position as a leader in responsible investing within the fixed income space.