The market continues to struggle to wean itself off duration as the sole means of downside protection, Hermes IM’s Fraser Lundie has said.
Citywire AAA-Lundie, who manages the Hermes Multi-Strategy Credit fund, said he has combatted investors’ reliance on duration by having a combination of high conviction investments with defensive strategies.
‘This allows us to perform strongly in periods where government bonds and risk asset move in the same direction,' he told Citywire Selector.
‘Our concept of a defensive bucket within Multi-Strategy Credit is specifically designed to protect against rising interest rate volatility and in markets such as a taper tantrum, bund shock, and Trump election, it has successfully done so.’
One example of in Lundie’s defensive bucket is a structural trade on Dell Capital.
‘The technology sector is now richly priced and the company is less likely to achieve its debt reduction and investment grade target within the stated timeline.
'We see a repricing of the relationship between its secured and unsecured layers of the capital structure and are positioned to benefit from such a move.
'Despite this year’s unbridled rally, we see plenty of opportunities in 2018. However, dynamic, nimble management and the sizing of positions in the riskier parts of the market will be necessary.'
Aside from the fund’s focus on its defensive bucket, Lundie said the vast scope of the bond strategies sector has helped to bolster returns.
‘We have benefitted from our use of the full breadth of the global liquid credit asset class, investing in bonds, derivatives and loans in a market in which security selection within a company and optimisation of convexity have been key to maximising risk-adjusted returns.
‘The globalisation of the debt capital markets continues to gather pace, with the Reverse Yankee market offering opportunities for global investors to invest in securities that offer extra return with no incremental default risk.
To capitalise on this opportunity, Lundie said the team increased exposure to this segment of the market by adding US-based healthcare company Quintiles’ euro-denominated bond.
‘Another theme we continue to benefit from is the steeper credit curves driven by positive flows into short duration strategies, creating opportunities for extension trades with an attractive combination of outright spread pick up and roll-down.
'One example is Norilsk Nickel in the EM investment grade space, where we could materially enhance our compensation by positioning further out the curve.'
Over the three years to the end of October 2017, Lundie returned 22.86% in euro terms. This is while the average manager in the Alt Ucits - Bond Strategies category returned 2.60%, over the same time period.