Investment Universe, Process, Strategy and Benchmark – How does the Fund Manager invest? (ISIN: LU0081336892)Gershon Distenfeld: "We believe that inefficiencies in the global debt markets arise from investor emotion, market complexity and conflicting investment agendas, and that the resultant mispricings in securities and sectors are the biggest potential source of added value for our clients. We use quantitative and fundamental research to identify and exploit these inefficiencies, as we believe this combination provides higher and more reliable alpha than either discipline can provide separately. Quantitative and fundamental Research exploits different, yet complementary, opportunities founded in investor behaviour.
Our Global High Yield portfolio seeks to produce high current income as well as overall total return by investing primarily in a portfolio of high-yield debt securities of issuers located throughout the world, including developed and emerging countries. The portfolio invests in both US dollar and non-US dollar-denominated securities.
We follow a disciplined, three-step investment process.
1. Research: The first stage is where our research teams develop their views and forecasts. Our quantitative research team develops expected return forecasts for countries, yield curves, securities, and currencies, identifying those that appear most/least attractive from a purely quantitative standpoint. Concurrently and independently, our fundamental research teams (economics, credit and structured assets) are performing their own in-depth fundamental research, and developing their own forward-looking expected returns, which either confirm or refute the quantitatively derived findings.
2. All forecasts are debated and vetted at formal “research review” sessions: Once each set of research forecasts has been made, our most senior research, portfolio management and trading professionals meet in formal monthly “research review” sessions, which are held or each sector of the market—interest rates & currencies, credit, securitizations, emerging-market debt and municipals. During these meetings, the research review team assesses, compares, and contrasts the quantitative and fundamental forecasts. Crucial to this process is an in-depth analysis of the specific drivers behind each quantitative and fundamental forecast.
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3. Portfolio Construction: The outcome of each research review session is a set of portfolio themes to be implemented in portfolio construction. The portfolio management team then translates these themes into specific portfolio risk target and positioning. The team budgets risk across countries, yield curves, securities, and currencies. When we have dual advocacy for a forecast from both the quantitative and fundamental standpoints, we have higher conviction in that forecast and therefore will typically take larger positions in the related country, security, or currency."
Performance Review 2005
Paul J. DeNoon: "In 2005, the fund rose in euro terms, outperforming its custom benchmark (33% Merrill Lynch High Yield Index, 33% JP Morgan ELMI Plus, 33% JP Morgan EMBI Global Index). Our performance was driven primarily by emerging markets, which were the best-performing fixed-income sector for the year."
Performance Review 2006
Gershon Distenfeld: "In 2006, the fund ended the year modestly higher in euro terms, performing broadly in line with its custom benchmark. Country and security selection in dollar-denominated emerging-market debt contributed to performance."
Performance Review 2007
Paul J. DeNoon: “The subprime mortgage crisis started in 2007, heralding challenging conditions for corporate bond managers as investors began to move out of risk assets into safe havens such as government bonds. The fund experienced a loss in euro terms, performing roughly in line with its custom benchmark. Security selection in high-yield corporate bonds detracted somewhat from relative returns, while an overweight in higher-rated financial paper also had a negative impact on performance.”
Performance Review 2008
Gershon Distenfeld: “The subprime crisis escalated into a broader global credit crisis in 2008, driving a flight to quality and shedding of risk, sending credit spreads to levels not witnessed since the inception of the global high yield markets. The fund declined in euro terms, underperforming its benchmark*. While the fund´s performance was not driven by direct exposure to subprime securities, its exposure to high yield corporate credit and emerging markets resulted in volatile performance.”
*In 2008 the custom benchmark changed to 33% Lehman Brothers High Yield 2% Constrained / 33% JP Morgan GBI-EM / 33% JP Morgan EMBI Global Index.
Performance Review 2009
Paul J. DeNoon: “Coordinated monetary and fiscal stimulus measures by global economic policymakers set the stage for a sharp rebound in investor risk appetite in 2009. Following the massive credit sell off of the previous 18 months, we believed we were seeing unprecedented opportunities in corporate bonds and we took advantage of numerous opportunities early on. The subsequent rally in credit helped the fund to rise significantly in euro terms and outperform its custom benchmark. Returns were helped in part by commercial mortgage-backed securities, which generated very strong excess returns.”
Performance Review 2010
Gershon Distenfeld: “Although the market’s secular recovery remained largely intact in 2010, supported by resilient emerging-market economies, the European sovereign debt crisis and concerns about a double-dip recession in the developed economies triggered several bouts of risk aversion among investors. The fund rose in euros, outperforming its benchmark. The portfolio’s strong performance was driven in part by the decision to overweight high-yield corporate debt relative to emerging-market bonds.”
Performance Review 2011
Gershon Distenfeld: “In 2011, our Global High Yield Portfolio outperformed its benchmark. Returns were muted to market volatility due to U.S. Treasury downgrade and European Sovereign crisis. We reduced our local currency exposure in response to this volatility. The portfolio’s performance was driven by the decision to overweight U.S. high yield corporate debt relative to other credit sectors due their strong balance sheets and fundamentals. Hard currency emerging market bonds outperformed during the flight to quality period in the fall. However, compared to our custom benchmark we were underweight hard currency emerging market debt, so we had negative sector and security selection. We continue to believe that corporate high yield bonds represent the best risk/return opportunity in the global high-yield markets and find current risk premiums attractive relative to emerging-market bonds."
Performance 2012 - Year-to-Date
Gershon Distenfeld: “In the first quarter, our performance has been driven by increased beta of the portfolio during. We continue to believe that corporate high yield bonds represent the best risk/return opportunity in the global high-yield markets and find current risk premiums attractive relative to emerging-market bonds. While we have added, and will continue to add, select currencies or currency pairs based on valuations, we find the downside risk and volatility within emerging-market currencies very high, and continue to be underweight currency risk on a broad level. We still expect a mild contraction in Europe this year and we continue to emphasize diversification and not reaching for yield in this economic climate.”