French asset manager Carmignac has tabled plans to double the expected leverage levels in its flagship Patrimoine fund following.
The announcement comes following a disappointing year of performance for the fund and could see levels rise from 200% to 500%.
Plans were announced on February 26, which would allow for the use of more derivatives in the portfolio in the giant mixed-asset fund.
In a statement, the group said the changes to the €21.45 billion fund will have no effect on the funds’ risk profile. Likewise, it should not alter the philosophy nor investment process of the fund.
Carmignac stressed that 'expected level of leverage' is a regulatory term which measures the gross, nominal value of derivatives used. It does not imply a fund is taking on more debt.
While the new expected level has increased, the group has not made any changes to the leverage level so far. The move has been made in anticipation of the normalisation of monetary policies by central banks, the group said.
‘As active fund managers, it is our role to anticipate this and equip ourselves with the right tools to deal more effectively with this new challenging environment.
‘We anticipate a more extensive use of interest rate and foreign exchange derivatives for risk management purposes.
'These derivative instruments happen to have high gross nominal amounts, explaining why we have decided to increase the expected level of leverage.’
The new expected level allows the group to use interest rate derivatives as protection against rising rates. By shorting interest rate derivatives, the group will reduce modified duration, it said.
This change to the fund also enables the manager to use FX derivatives to neutralise a foreign currency.
In the fund’s latest quarterly report, the managers admitted to a disappointing performance in 2017.
'Our fixed income portfolio did better than its reference indicator (–2.87%), yet was unquestionably a source of disappointment during the year, mainly because of inadequate hedging against the slide in the US dollar and our defensive bias on German long-term yields.’
Gearing for a turnaround
Opening the quarterly meeting in January, Edouard Carmignac faced up to the disappointing performance figures from last year. Speaking to a packed investment audience, he said: 'Performances were not up to your expectations and were far from mine.'
Carmignac will return to previous levels of performance he assured the audience of investors. 'The disappointing performance was largely down to changes in markets but also in the company.'
Looking at markets, Carmignac said central banks remain the clear focus given the three decades of liquidity which have been pumped into global markets.
Over three years to then end of January 2018, the Carmignac Patrimoine A EUR Acc fund lost 3.89% in euro terms while the Citywire-assigned benchmark, the LCI MSCI AC World TR EUR/Citi WGBI TR EUR (50:50), returned 9.08% over the same period of time.