David Byrne: "2006 proved to be a very low volatility environment, and peripheral European bonds from such issuers as Spain, Portugal & Greece traded with little or no additional spread premium to the underlying “risk-free” German Government Yield Curve. In the face of deteriorating fundamentals, the portfolio manager underweighted all peripheral European bonds, and with overweights in the high quality core markets. This cost the portfolio in terms of negative carry, and led to a benchmark-relative underperformance, but on a cost-adjusted basis the Fund outperformed its’ JP Morgan EMU Traded Index."
Performance Review 2007
David Byrne: "2007 again proved to be a very low volatility environment, and the portfolio continued to suffer in terms of negative carry, due to the peripheral sovereign underweight. A number of small tactical duration bets were implemented, which slightly added to portfolio performance. European Fundamentals, and excesses in a number of banking systems continued to build in the face of ever-tighter corporate spreads. The portfolio showed a benchmark-relative underperformance, in both cost-adjusted & non-cost-adjusted basis."
Performance Review 2008
David Byrne: "The portfolio proved to be correctly positioned for the onset of the banking crisis in 2008, where a sharp rise in volatility precipitated a sharp widening in credit spreads, along with a marked underperformance of the weaker peripheral European sovereign issuers. An overweight duration position also helped with benchmark-relative performance, leading to outperformance on a cost & non-cost-adjusted basis."
Performance Review 2009
David Byrne: "The 2009 decision to maintain the peripheral underweight proved to be a costly one in terms of portfolio performance, as Italy, Spain, Portugal, Greece et al demonstrated a massive outperformance versus the ‘low risk’ core markets. The portfolio remained positioned with an overly-conservative bias, and failed to capitalise from the sharp rally in risk assets which continued throughout the year. The portfolio underperformed sharply in both cost-adjusted & non-cost-adjusted terms."
Performance Review 2010
David Byrne: "2010 proved to be an excellent year in terms of fund performance, as the 2008 banking crisis transformed into the European sovereign crisis, as liabilities were effectively transferred onto the public balance sheet. The portfolio maintained a general overweight in duration for much of the year, with a strongly defensive bias in terms of peripheral exposure. A zero portfolio weight was maintained in Ireland, Greece, Portugal, and Spain, leading to strong benchmark relative outperformance."
Performance 2011 - Year-to-Date
David Byrne: "2011 has proved to be a continuation of 2010, with ongoing volatility in the peripheral sovereign markets, albeit with a bias for further spread widening. The portfolio has been actively taking advantage of the spread volatility in a number of better rated eurozone sovereign markets; including Belgium, Finland, and France. In terms of duration positioning, the portfolio has been slightly underweight versus its’ JP Morgan EMU Govt Traded Index since the beginning of the year. The portfolio continues to outperform its respective benchmark."
Performance since 2006
Investment Process and Strategy – How does the Fund Manager invest?
The investment process is two-fold:
• The portfolio managers receive a great deal of macroeconomic research from our major bond market counterparties. The portfolio-relevant issues are highlighted and utilised to complement our own economic research. We tend to focus on actual ‘leading indicators’ as opposed to consensus forecasts as they have a poor record, and are subject to frequent revisions. The fundamental outlook is discussed within the monthly “Interest Rate Track” meeting, along with a full review of the respective government markets, term structures, and forward curves.
• Following the above review, market entry & exit points are determined, based on momentum & technical analysis. The potentially negative effects of “Cost of Carry” & transaction costs are then factored into the decision process as the final determinants of implementing the strategy. The interest rate track decision is then applied to the overall Swisscanto Asset Allocation at the monthly “Strategy Meeting.” (See summary below.)
David Byrne: "There are two main factors which continue to drive the sovereign EURO government bond market. First of all, there is the ongoing sovereign crisis, whereby the European Authorities continue to support Greece, Ireland & Portugal, fearing the devastating effect that a restructuring event would have on Europe’s undercapitalised banks. The authorities currently seem happy to “kick the can further down the road” in the hope that the weaker members of the Eurozone will eventually revitalise their domestic economies, and to generate some economic growth. Secondly there is the ongoing debate as to the speed of a normalisation in monetary policy from the European Central Bank.
As far as a solution to the sovereign crisis is concerned, the two possible eventual outcomes are becoming ever polarised, with either: (a) Germany effectively agreeing to fiscal transfers (guaranteeing) the weaker members of the Eurozone, or (b) A partial or full break-up of the Eurozone. The risks for the latter outcome are relatively low, but are still a meaningful tail-risk nonetheless.
In terms of portfolio positioning, the duration is currently neutral versus the benchmark, with an overweight bias for the better quality sovereign issuers; Germany, Finland, and the Netherlands. Aggressive duration positioning is not currently an attractive risk-reward proposition, in the face of too many unknowns. The as yet unsolved sovereign crisis, with two very different possible outcomes, and a Central Bank embarking on monetary tightening would not predicate an overweight position. The sharply negative-carry effect would make an aggressive duration underweight, a very expensive & losing proposition in all but a sharply rising yield environment."