We are a team of 6 fund management professionals that has long been with AXA IM, for 6 years on average, with an average 10-year market experience. Our approach is very collegial, we tend to back each other on most of the funds, so that there is true teamwork in building our investment convictions and implementing them.
e-fundresearch: Which benchmark do you adhere to?
Velot: We benchmark the fund against the Merrill Lynch EMU Corporates 1-3 years. This has changed from the previous index which was a Citigroup Eurobig 1-3 years, an aggregate benchmark, including both government and credit bonds. Having duration and curve bets seemed to us quite difficult to optimize on such a maturity band, and we had always concentrated on generating alpha through our credit expertise, so we decided to reset the benchmark to reflect more truthfully the performance drivers.
e-fundresearch: Are you also responsible for other funds at the moment?
Velot: Yes, I am responsible for two absolute return fund and co-manager on a Euro Credit mandate for an institutional investor.
e-fundresearch: What is the total volume that you manage in all your funds?
Velot: € 800m directly, € 1.8bn when including the co-managed funds and adding both cash and CDS positions on the latter.
The team as a whole manages a total of € 7bn of assets.
e-fundresearch: Regarding the performance: which performance did you achieve since the beginning of the year and in the years 2003-2008? Absolutely and relatively to the relevant benchmark?
e-fundresearch: How content are you with your own performance in the last years and this year?
Velot: The 2003-2008 period has been highly influenced by the dichotomy between the aggregate benchmark and the credit focus of the fund, where government bonds set record levels of performance whilst our credit positions were severely hampered in their valuations by the liquidity crunch. This was not satisfactory in our eyes, and from mid-2008 we started to disinvest massively from the subordinated debt market across our funds and reduced our asset-backed positions as well, which had significantly impacted our track records. This set us in a defensive position which started to be beneficial in terms of our performance in the last quarter of 2008, upon the failure of Lehman Brothers. Since then, we have switched back our investment style to more pro-cyclical sectors and added back subordinated debt, from the spring of 2009, another move that boded well for out performance since then. On the other hand w have stayed away from the ABS market, which did help us in accelerating our recovery from 2009, and we do not expect to go back into that sub-sector which we learnt is quite illiquid.
e-fundresearch: How are you able to deliver added value for your investors with your performance?
Velot: We have had strong top-down calls on the credit market from 2008 onwards, as explained here above, that did deliver added value to our investors, both on the downside in 2008 when we started selling our financial exposure and in 2009, when we timed adequately our decision to add back risk in the credit market, whilst the risk-reward equilibrium looked attractive to us, and we did it in choosing the most appropriate sectors that did outperform the market.
e-fundresearch: How long have you been a fund manager already?
Velot: I have been a fund manager since 2003, and I have always focused on the Euro Credit market, both on open funds and dedicated mandates, and both benchmarked and absolute return funds.
e-fundresearch: What were your biggest successes and your biggest disappointments in your career as fund manager?
Velot: The credit crisis that unfolded in 2007 and 2008 was my most striking experience as a credit fund manager. The complete dislocation of the banking system created a very special situation in our market whose liquidity depends entirely on the willingness of our counterparts to have the ability to trade bonds, hence to have enough capital set aside for their intermediation risk. The dry-up in liquidity we experienced moved prices very far for fair value was a dreadful experience.
On the other end, we learnt a lot from it. It definitely helped us to build our best successes afterwards. It enticed us to reduce our subordinated debt exposure in the summer of 2008, whilst the market was feeling better but we thought the financial system was not out of its woes. It helped us to stick to this strategy, which led to very strong outperformance from September 2008 onwards. In 2009, one major success was also our ability to call the turn in the credit market, upon our analysis of the sentiment and demand drivers.
Earlier in my career I can also recall precise moments where we had strong calls on the telecommunication sector and avoided Worldcom default, and how we astutely invested in Ford Motor Credit and GMAC short dated bonds until early 2008, extracting lots of value for our investors whilst avoiding the more troubled times for these 2 companies.
e-fundresearch: What kind of capital market situation do we have at the moment? How do you act in this environment?
Velot: The market is in transition mode. The financial system is still deleveraging, especially in Europe, whilst rebuilding its business model and facing uncertainties over the new set of regulations, both in banking and insurance. The set of participants in the credit market has also changed, with increased participations from insurers and retail investors, whose behaviours have not been tested throughout a full credit cycle. This leaves us in a rather defensive position as far as liquidity is concerned, with very diversified and granular portfolios.
e-fundresearch: What are the special challenges in this environment?
Velot: The economic recovery is unfolding, but at different paces for different parts of the world. The most important for us is to make sure we select the issuers that will be best positioned for that. More generally, whilst we will oscillate between fears of double-dips and fiscal consolidation in Europe on one side and fears of inflation, we have to navigate steadily into this environment and offer the best investment path to our clients, with a clear strategic view and limited gyrations around our central scenario.
e-fundresearch: What objectives do you have till the end of the year and in the mid term for the upcoming 3 to 5 years?
Velot: The credit asset class should deliver a 4 to 6% performance this year, depending on where you sit on the maturity band and your ability to diversify in high yield, and what would be the scenario for interest rates. The AWF Euro Credit Short Duration should sit comfortably in the middle of that range. The performance will come essentially from a further compression in credit spreads, improved liquidity giving us opportunities to remain very active in our management, and a broad range of new issuers that will come to tap the market with potential attractive premiums, at a time where corporates will continue to diversify their sources of funding.
Going forward, we expect the further recovery in the coming years will offer a supportive background for credit investors. Increased disintermediation now offers new opportunities for diversification. The new regulation coming ahead in the bank and insurance sectors will also re-deploy the hybrid debt market and may also offer opportunities for added value. Once the recovery is behind us in the next few years, one will have to remain very selective in avoiding credits that will be tempted to releverage their balance sheets and potential LBO transactions, which we will focus on with our dedicated research capabilities.
e-fundresearch: Do you model yourself on someone? Any ideals?
Velot: I adhere to the values of my company, which influence the collegiality of our decision model, the respect we have for each others’ ideas, and the strong ownership of our performance responsibilities. I have lived many years away from France, in different Asian countries and in the United Kingdom, which itself is a very diverse society, and I value respect for each others’ difference, which I think helps me to remain fair and open in a professional context.
e-fundresearch: What motivates you in your job?
Velot: I like analysing the economic and market conditions, identifying turning points and new trends. I like discovering the companies we invest into, the people that make these companies and the stories they have to tell. I like discussing all of this with my colleagues to reach investment decisions, see how they unfold and learn from it.
e-fundresearch: What else do you want to achieve or do you have any further aims as a fund manager?
Velot: My main objective is to deliver performance form my clients. In addition, I feel committed to transparency and accountability on my acts and my decisions towards them.
e-fundresearch: What other profession would you have taken interest in, apart from becoming a fund manager?
Velot: I could have had an interest in setting my own company.
e-fundresearch: Thank you for the interview!
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