Investment Universe, Process, Strategy and Benchmark – How does the Fund Manager invest? (ISIN: LU0556616935)Risk-managed investment strategy - The fund invests primarily in sub-investment-grade euro-denominated debt securities. There are a number of key reasons why investors should consider allocating to the European high yield debt market in the near term and over the longer term. In a low rate environment, we expect demand for yield to be high among European investors looking to meet liabilities over the coming period. There has been a significant decrease in default rates for corporate issuers as they continue to demonstrate strong fundamentals with earnings beyond expectations. Valuation levels remain attractive in our opinion, presenting investors with an attractive risk/return trade-off. It is also important to highlight the favorable conditions for the euro high yield market. The asset class has experienced significant growth over the last ten years, and looking at future issuance forecasts, growth should remain strong.
Idea generation is at the heart of the investment process. An original investment thesis is generated through in-depth proprietary fundamental research. Natixis Asset Management benefits from the experience of a team of 12 credit analysts. The Natixis Euro High Income strategy also benefits from a full-time high yield analyst, with support from 11 other analysts working over investment-grade and high yield securities. Relative value analysis helps portfolio managers ensure that the most attractive opportunities versus peers, the relevant universe or the entire investment universe are appropriately integrated into the portfolio.
The fund adopts a pure bottom-up approach when it comes to generating value. The main alpha driver is security selection. The fund does not look to take on relative duration or currency risk.
Three-part investment process
1) Credit direction and idea generation
Proprietary credit research is undertaken to assess investment potential, favoring sustainable business models with predictable cash flows, improving industry fundamentals, and positive cash flow with excess used to improve creditworthiness.
2) In-house research
A rigorous fundamental credit analysis of issuers takes place, blending the absolute and relative value of issuers. A team of credit analysts give a proprietary fundamental rating to issuers with a horizon of 3 years from HY1 (core) to HY3 (cautious) and ‘Avoid’. A positive/negative 12-month outlook takes place, followed by event risk analysis and finally a target rating.
3) Portfolio construction and management
A well-diversified, bottom-up portfolio is constructed and maintained with the objective of ensuring a risk adjusted return through ongoing analysis of issuers and relative value analysis compared to peers, sector and investment universe.
• Investment universe – The fund may invest in fixed income securities, corporate debt securities and convertible securities issued by companies worldwide including emerging markets.
• Pure approach – The team aims to generate attractive risk adjusted returns by exploiting inefficiencies across the sub-investment-grade euro denominated corporate debt market.
• Research-intensive –Experienced credit research team of dedicated sector specialists.
• Focused approach to generating value – Security selection is the key alpha driver; the fund does not look to take on relative duration or currency risk.
• Risk management – Seeks to identify potential downgrade or default risk and actively manage systematic risk related to credit accordingly, while ensuring appropriate portfolio diversification.
• Asset class -Euro High Yield
• Style -High Yield - Research Intensive
• Objective -High total investment return through a combination of high current income and capital appreciation
• Index -BofA Merrill Lynch Euro High Yield BB-B Rated Constrained Index
• Inception -18 November 2010
• Reference currency -EUR, SGD, SGD-hedged
• Other currencies available-None
• Recommended investment horizon -3 years
Performance Review 2011
Berthelot & Marioni: "In spite of the crisis which dominated the summer in the Eurozone and the economic slow-down, the last quarter of 2011 saw a considerable rebound in the performance of the European high-yield market and the Fund. The month of October was particularly positive thanks to the hopes raised by the European summit in October. Confidence rapidly faded, however, and the gains were wiped out from the following month. Illustrating the uncertainty and volatility of the market, in December the trend finally returned to an upward one to end the quarter on a positive note and the year at a level close to that of the end of August 2011. During that quarter, some names with a strong Beta stood out, many of whom outperformed the market. We maintained a moderate cash position during the quarter in order to tap into the attractive debt carry. With bid-ask price differences of more than 2 points, the Fund managed to considerably outperform its index over the period. The Fund benefitted from maintaining a slight overweight on subordinate financial debt, opportunistic transfers of cyclical stocks and, in more global terms, rigorous selection of its issuers.
The turbulent developments of the eurozone crisis together with the recessionary macro-economic climate were once again the two main themes in the European high-yield market in the fourth quarter of 2011. However the market continued to be directed mainly by systemic risk. The European leaders struggled to demonstrate unity and convince people of the strength of their successive rescue plans, in the absence of any strong commitment by the ECB.
Two major summits were held in this quarter. The summit in October gave rise to a surge in optimism, but that dissipated within a week. Among the resolutions adopted, few have actually been implemented (a 50% haircut on the Greek debt, the lever effect for the EFSF). The second summit in December allowed a display of greater cohesion but did not offer a concrete solution in the short term. Being aware of the risks, the ECB tried to boost the banks and the economy by lowering its headline rates by 25 bps in November and December. It also offered the banks a possibility of refinancing in U.S. dollars and put in place unlimited refinancing for 3 years.
Although positive in themselves, these measures were not enough to reassure the market about the governance of the eurozone. This translated to growing tension about Italian and Spanish sovereign debt rates, averaging 6.6% and 5.6% respectively over the quarter for the 10-year rates. By contrast, the micro-economic environment was positive overall. The 3Q11 company results were satisfactory and frequently surprised markets with their rise.
On the other hand, issuers that had disappointed the market were heavily punished (Thomas Cook debt in Euros lost 48 points after their results were published). In October, financial markets recovered some of the losses of the summer, but in the end gave them back the next month owing to the return of risk aversion. However, several banks initiated public buy-back or exchange offers for subordinated debt and were able to offer up to 10% premiums. These initiatives allowed this specific segment of the market to be marginally revived.
As for the primary market, the lethargy of the summer continued with almost no new issues in spite of an impressive list of candidates. Outlook The macro-economic and political context is particularly uncertain for 2012. There are numerous threats to the European economy pointing towards the real risk of a recessionary phase.
The duration and extent of that phase will be a decisive factor in the performance of the European high-yield market next year. Issuing banks will start 2012 with stronger balance sheets than in previous crises, which should logically keep the default rate historically low. Moody’s anticipates a 1-year default rate of 2.4% in Europe, which is lower than the 2.6% recorded this year.
However, a protracted recession will have a significant impact on 2013. Nevertheless, the yields offered by this asset class are attractive and already allow for a negative scenario for 2012. Moreover, the diversification of the European high-yield market should increase considerably next year, bearing in mind the mindset of rating agencies which could raise the proportion of fallen angels returning to our universe. The primary markets should offer some good opportunities. In fact, new issues will logically involve the strongest issuers with attractive premiums. Consequently, the scenario for 2012 suggests a particularly volatile start to the year, but ultimately a positive year for High Yield.
Performance 2012 - Year-to-Date
Performance since 2010
Philippe Berthelot, CFA, Head of Credit Management Teams
(Corporate, Satellite and Structured Credit)
Philippe Berthelot began his career in 1992 at CDC Gestion, as a fixed-income and money market portfolio manager. In 1998 he joined AXA Investment Managers (Paris) where he managed portfolios on euro aggregate and credit.
He became Head of Euro Credit in 2002, and then Head of Euro Fixed Income in 2006. In January 2009 he was promoted to Head of Continental Credit Europe, before joining Natixis Asset Management in January 2010 as Head of Credit Management Teams (Corporate, Satellite and Structured Credit).
Philippe is a CFA charter holder. He holds a master’s in management science from the European Business School (Paris) and a master’s in finance from ESC Tours (a French graduate business school).
Vincent Marioni, Portfolio Manager
Vincent Marioni joined Natixis Asset Management in 2009 as a senior portfolio manager specializing in corporate credit. He started his career in 1998 as a credit analyst at Ixis Capital Markets. In 2002 he became corporate credit manager at La Banque Postale and was responsible for European ABS management.
In 2005 he joined BPCE in order to manage a portfolio of cash and synthetic arbitrage, credit investment grade and high yield. Vincent holds a master’s in treasury, finance and risk management from SKEMA Business School and is an EFFAS (European Federation of Financial Analysts Societies) charter holder.