Ignis Absolute Return Credit Fund Chris Bowie
Head of Credit Portfolio Management and Portfolio Manager
October 2013
0
2013: high credit volatility
October 13
1
Ignis Absolute Return Credit Fund
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13
Performance year-to-date
Markit iBoxx Euro Corporates TR
Source: Lipper, from 31/12/2012 to 30/08/2013
-3%
-2%
-1%
0%
1%
2%
3%
Jan 0
8
Mar 0
8
May 0
8
Jul 0
8
Sep
08
No
v 08
Jan 0
9
Mar 0
9
May 0
9
Jul 0
9
Sep
09
No
v 09
Jan 1
0
Mar 1
0
May 1
0
Jul 1
0
Sep
10
No
v 10
Jan 1
1
Mar 1
1
May 1
1
Jul 1
1
Sep
11
No
v 11
Jan 1
2
Mar 1
2
May 1
2
Jul 1
2
Sep
12
No
v 12
Jan 1
3
Mar 1
3
May 1
3
Jul 1
3
Monthly returns of iBoxx Euro Non-Sovereign Index (Total Return)
Credit is not a low risk asset class
October 13
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Ignis Absolute Return Credit Fund
Source: Bloomberg, from 31/12/2007 to 30/08/2013
Volatility not just caused by sovereign yield exposure
October 13
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Ignis Absolute Return Credit Fund
-4%
-3%
-2%
-1%
0%
1%
2%
3%
Jan 0
8
Mar 0
8
May 0
8
Jul 0
8
Sep
08
No
v 08
Jan 0
9
Mar 0
9
May 0
9
Jul 0
9
Sep
09
No
v 09
Jan 1
0
Mar 1
0
May 1
0
Jul 1
0
Sep
10
No
v 10
Jan 1
1
Mar 1
1
May 1
1
Jul 1
1
Sep
11
No
v 11
Jan 1
2
Mar 1
2
May 1
2
Jul 1
2
Sep
12
No
v 12
Jan 1
3
Mar 1
3
May 1
3
Jul 1
3
Monthly capital returns from spread moves
Source: Bloomberg/Ignis based on spread change (iBoxx EUR Non-Sovereign Index) x duration = spread return. Data from 31/12/2007 to 30/08/2013
Absolute return strategies can counter this volatility
October 13
4
Ignis Absolute Return Credit Fund
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13
Performance year-to-date
Markit iBoxx Euro Corporates TR Ignis Absolute Return Credit I EUR
Source: Lipper, based on the Ignis Absolute Return Credit Fund EUR I share class net of fees from 31/12/2012 to 30/08/2013
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.
Absolute return strategies can enhance risk/return profile
October 13
5
Ignis Absolute Return Credit Fund
Source: Ignis, assumptions based on combination of historic/forecast performance of assets. All data for illustrative purposes only
3%
4%
5%
6%
1.5% 2.0% 2.5% 3.0%
% E
xpec
ted
An
nu
alis
ed R
etu
rns
% Expected Annualised Volatility
Expected Return/Volatility
Absolute return credit
Investment grade credit - EUR
Efficient frontier
10% allocation to absolute return credit
30% allocation to absolute return credit
Growth in the developed world is recovering
Unusually accommodative monetary policy expected to end
- Fed tapering to reflect self-sustaining US recovery
- QE in UK to end
- Eurozone has stopped its decline
Yields still at historic lows, a move back to where they should be at this stage of the capital cycle will lead to losses
October 13
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Ignis Absolute Return Credit Fund
Outlook: challenging conditions for credit to continue
Traditionally, the flow of new issuance and secondary trading has been supported by investment banks’ risk appetite and risk capital
Banks’ capital reserves have shrunk post-crisis due to regulatory constraints/risk aversion
While new credit issuance still being absorbed, liquidity within the secondary market has been severely constrained
This restricts the long-only manager’s ability to trade corporate bonds both cheaply and in size
Credit derivatives offer far more liquidity
October 13
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Ignis Absolute Return Credit Fund
Liquidity has also become an issue
New issuance
Secondary trading
Liquidity
Pure alpha Market neutrality Positive performance in
all market conditions Zero duration risk
Absolute Return Credit
October 13
8
Ignis Absolute Return Credit Fund
Designed to deliver:
High conviction
research ideas Global opportunities Investment grade to
high yield credit Liquid CDS as part of
pair trading strategy
Investing in:
Low volatility (6% ceiling)
Low correlation with traditional asset classes
High information ratio
Targeting:
Ignis Credit: multi-specialist team managing €16.8bn
Analysts Years in industry
Sector Background
David Meade 28 Corporates Fidelity, Morgan Stanley, S&P
Michael Ewing 24 Banks Epic, UBS
Rosalie Pinkney
16 Financial Institutions
BGI, Fitch
Janaka Nanayakkara
13 CMBS, ABS Chalkhill, M&G, Investec
Scott Duggal 10 ABS Fitch, Shell AM
Nadia El Alaoui
9 TMT, industrials BNY Mellon, Lehman
Albane Poulin 7 Fixed rate ABS, utilities
Insight
Matt Creamer 5 Money market research
KPMG
Faiz Boustany 1 Insurance Joined Ignis from university
October 13
Ignis Absolute Return Credit Fund
9
Portfolio managers
Years in industry
Fund type Background
Chris Bowie 21 3rd party, fixed rate ABS
AEGON, Murray Johnstone
Phil Heaney 23 Financials Minet, Trade Indemnity, WestLB
Adam Walker 15 3rd party, non-financials, Europe
Barclays
Matt Guzzo 15 Floating rate ABS Hypo Real Estate
Gordon Shannon
6 Fixed rate ABS Towers Watson
Source: Ignis at 31/08/2013
Investment process: simplicity and pragmatism
Positions sized to historic volatility and stop loss set
Most profitable opportunities selected and appropriate hedge determined
Idea generation from detailed research
Trade propositions debated and filtered
Generate
Challenge
Decide Implement
Profits taken/stop loss activated/positions closed
Monitor
October 13
Ignis Absolute Return Credit Fund
10
Research agenda set by Head of Credit Research
Filtered universe of circa 270 global issuers divided into two groups:
- Tier 1: complex, volatile issuers that present the greatest opportunity and risk
- Tier 2: stable, well-known issuers presenting fewer opportunities and risks
Additional capacity to research adhoc issuance
Database identifies anomalous credits by sector, ratings band, currency and on an individual basis
Credit universe filtered to ensure focused research
*Source: Ignis at 31/05/2013; **Source: Ignis at 31/03/2013
Credit sector exposure* ABS
Banks
Cash
Consumers
Covered
Financial Services
Gilts
Industrials
Insurance-Wrapped
Insurance
Overseas Governments
Sovs/Supras
TMT
Utilities
Credit opportunities exposure**
Tier 1
Tier 2
October 13
Ignis Absolute Return Credit Fund
11
Superior proprietary technology:
Enables all pricing dislocations to be isolated and analysed
Contains daily spread data back to 2003
Cross-references market and stock news to price moves
Identifying relative value opportunities
October 13
Ignis Absolute Return Credit Fund
12
Spread of bond versus sector regression Ratings’ spread history
Snapshot of bonds filtered by criteria Credit yield curve
Challenge Generate /
Ideas reviewed and tested by heads of
portfolio management and
credit research
• Most profitable opportunities selected
• Suitable position size set • Exit strategy determined • Existing holdings reviewed
Analysts put forward investment rationale: • performance drivers/catalyst • suitable hedge instrument (to
eliminate market risk) • price target/time-horizon • downside case/stop-loss • expected pay-off
Regular meetings and ongoing debate to ensure optimal portfolio positioning
Identify best ideas
October 13
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Ignis Absolute Return Credit Fund
Proposition Decide Challenge
Idea to be refined Portfolio construction stage
Decide Challenge /
Sizing trades
0
50
100
150
200
250
300
350
400
450
Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12
RBOS CDS EUR SR 5Y|BP HSBC BK CDS EUR SR 5Y|SP
Implement
Credit 1 Credit 2
Analyse two credits at latest spreads (1:1)
0
50
100
150
200
250
300
350
400
450
Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12
RBOS CDS EUR SR 5Y|BP HSBC BK CDS EUR SR 5Y|SPCredit 1 Credit 2 (adjusted spreads)
Establish ratio to equalise spread (1:2.1)
Ratio calculated at
latest spread
Source: Ignis. All data for illustrative purposes only.
October 13
Ignis Absolute Return Credit Fund
14
-150
-100
-50
0
50
100
150
200
Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12
Historic difference between the equalised credits plotted
Standard deviation band calculated
Trade sized to ensure downside risk limited to single standard deviation move
October 13
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Ignis Absolute Return Credit Fund
Sizing trades
Source: Ignis. All data for illustrative purposes only.
Implement
Historic difference of equalised credits (with standard deviation band)
Example position size calculation
Historic standard deviation of pair 180 bps
Spread duration value 500 bps
Maximum position size (of fund) 5.55%
+1 STD
-1 STD
Average
October 13
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Ignis Absolute Return Credit Fund
Portfolio construction and risk management
Existing holdings constantly monitored, rationale challenged
Liquidity risk
- CDS quotes from two or more counterparties
- spread “margin of safety” in low liquidity markets
Volatility risk
- volatility ceiling of 6%
Hedge ratio contribution monitored and adjusted if volatility between the pair changes from inception
Stop-loss*
- checks undertaken at 25bps loss
- initiate close of position at 50bp loss (assuming normal market conditions)
Leverage
- fund market exposures capped at 3x (currently 2x)
Diversification
- not for its own sake
- diversification of trade types, by industry and sector
Monitor gross sold protection
Monitor
*These are internal parameters which are not currently subject to independent review
200
250
300
350
400
May 13 Jun 13 Jul 13
Post NL
Telecom ItaliaResearch insight:
Post NL likely to be a more stable credit than Telecom Italia over near term
Action taken:
Long Post NL vs short Telecom Italia
Isolating α in a bear market
October 13
17
Ignis Absolute Return Credit Fund
Entry point
Exit point
Continued large funding requirements
More cyclical
Telecom Italia
Improving credit
following resolution of issues
Less cyclical
Post NL
Source: Ignis/Bloomberg based on trade from 31/05/2013 to 17/07/2013. All data for illustrative purposes only.
200
250
300
350
400
May 13 Jun 13 Jul 13
Post NL
Telecom ItaliaResearch insight:
Post NL likely to be a more stable credit than Telecom Italia over near term
Action taken:
Long Post NL vs short Telecom Italia
Outcome:
Long leg tightened and short leg widened
Gap between them widened from +30 to +155: making money
Gained €130,650 (long) Gained €109,881 (short)
Overall profit €240,532 (34bps)
Isolating α in a bear market
October 13
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Ignis Absolute Return Credit Fund
Source: Ignis/Bloomberg based on trade from 31/05/2013 to 17/07/2013. All data for illustrative purposes only.
Entry point
Exit point
0
20
40
60
80
100
120
140
160
180
May 13 Jun 13 Jul 13
Bp
s
Difference between the two credits
0.4%
0.9%
0.2% 0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
3 Months YTD Since launch Annualised Return
Performance
Ignis Absolute Return Credit I EUR
Performance
October 13
19
Ignis Absolute Return Credit Fund
Source: Lipper, based on the Ignis Absolute Return Credit Fund EUR I share class net of fees from 31/07/2012 to 30/08/2013.
*Source: Lipper/Ignis, ex post rolling 1 month volatility based on the Ignis Absolute Return Credit Fund EUR I share class from 31/07/2012 to 31/08/2013
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.
0%
50%
100%
150%
200%
250%
300%
0%
1%
2%
3%
4%
5%
6%
7%
Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13
Volatility and leverage Ex Ante Volatility (LHS)
Ex Post Volatility (LHS)
Gross Leverage (RHS)
Lowly correlated to other risk assets
Market neutrality
October 13
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Ignis Absolute Return Credit Fund
Ignis Absolute Return Credit
Fund
MSCI World Index
Citigroup World Gov’t Bond Index
Citigroup European
Gov’t Bond Index
iBoxx Non Gilt GBP
iBoxx Non Sovereign
EUR
Barclays Capital Global
High Yield
JP Morgan Emerging
Market Bond Index USD
Ignis Absolute Return Gov’t Bond Fund
Ignis Absolute Return Credit Fund 1.00
MSCI World Index -0.11 1.00
Citigroup World Gov’t Bond Index
-0.10 -0.12 1.00
Citigroup European Gov’t Bond Index
-0.23 0.07 0.81 1.00
iBoxx Non Gilt GBP -0.06 -0.17 0.77 0.78 1.00
iBoxx Non Sovereign EUR
-0.12 -0.04 0.74 0.81 0.83 1.00
Barclays Capital Global High Yield
-0.25 0.58 0.20 0.30 0.15 0.21 1.00
JPM Emerging Market Bond Index USD
-0.21 0.35 0.55 0.57 0.43 0.51 0.69 1.00
Ignis Absolute Return Gov’t Bond Fund
-0.01 0.11 -0.31 -0.19 -0.34 -0.29 -0.12 -0.15 1.00
Correlation
1.00
0.80
0.60
0.40
0.20
0.0
-0.20
-0.40
-0.60
-0.80
-1.00
Source: Morningstar, based on the Ignis Absolute Return Credit Fund EUR I share class net of fees from 31/07/2012 to 30/08/2013.
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.
What sets our absolute return strategy apart?
October 13
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Ignis Absolute Return Credit Fund
Future volatility for fixed income investors
Trajectory for yields is not only down
Our strategy can benefit from high volatility within credit markets
Bottom-up, unconstrained
High conviction global holdings
Risk management embedded within process; robust controls
Why us? Why different? Why now?
Designed to deliver:
- positive performance in all market conditions
- market neutrality
- zero interest rate risk
*Source: Ignis at 31/08/2013. ^This is the rate that large banks use to borrow from, and lend to, one another on the overnight market. Other share classes are available.**Performance fee is net of fees, over compounded cash rates and subject to a high water mark.
Fund manager Chris Bowie
Fund launch 31 July 2012
Fund AuM* €85.6m
Structure UCITS IV SICAV
Domiciled Luxembourg
Benchmark EONIA^
Liquidity Daily dealing
Share classes available in EUR, CHF, GBP, USD, SEK
Minimum investment EUR A Class: €1,000 EUR I Class: €1,000,000
Annual management fee EUR A Class: 1% EUR I Class: 0.5%
Performance fee** Fund manager is entitled to 10% of performance generated above EONIA^ with a high water mark
Registered for sale: Luxembourg, UK, Spain, Germany, Austria, France, Italy, Sweden, Belgium, Finland and the Netherlands
Fund profile
October 13
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Ignis Absolute Return Credit Fund
Disclosure
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 value of investments can fall as well as rise and is not guaranteed.
The Absolute Return Credit Fund will primarily invest in CDS which carry additional risks to investing directly in cash bonds. The fund will be subject to the credit risk of the counterparty as well as that of the CDS reference asset. If a credit event takes place, the CDS will be subject to the legal terms and conditions of the contract. 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 use of independent ratings is not a recommendation to buy and is not a guide to future returns.
The Ignis Absolute Return Credit 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, 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; Belgian 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.
This document has been issued by Ignis Investment Services. Ignis Investment Services is registered in Scotland Number SC101825. Registered Office: 50 Bothwell Street, Glasgow G2 6HR. Authorised and regulated in the United Kingdom by the Financial Conduct Authority.
23
October 13
Ignis Absolute Return Credit Fund