Next-Finance: Could you introduce the FF Global Strategic Bond Fund as well as your track record since the creation of your fund in terms of performance and volatility? How is your investment philosophy innovative and how does it distinguish itself from the other flexible funds?
Kevin Loo: The FF Global Strategic Bond Fund is a total return fund, set up in March 2011 (08-March-2011) that aims to produce consistent and stable returns with a low level of volatility. Unlike other bond funds, the asset allocation process is flexible, using a combination of strategic and tactical allocation for the following 5 global fixed income asset classes: sovereign and inflation-linked bonds, investment grade credit, emerging market debt and high yield.
Since inception, the FF Global Strategic Bond Fund annualized return has been 5,1%, with a 2,3% annualized volatility, in line with its risk/return profile.
At each stage of the investment process, the portfolio manager is a key player, using his fundamental views in order to smooth the profile of the fund returns in different types of market scenarios and to avoid tail risks.
Kevin Loo
Do you only use a quantitative model in order to determine your tactical and strategic allocation or do you also include fundamental views about the market?
As I said, the allocation process is flexible, using a combinaison of a strategic asset allocation (SAA) and a tactical asset allocation (TAA) through 3steps:
Step1 (SAA): Quantitative analysis to identify the strategic asset combinations to modelize a portfolio asset allocation minimizing drawdowns during crisis situations.
Step 2 (TAA): Selection of diversified tactical positions around this strategic framework – following in-house macro and bottom-up research - which will drive returns from duration or credit spreads for example.
Step 3: Fidelity research team provides guidance on “best-in-class” credit name selection for each fixed income asset classes.
At each stage of the investment process, the portfolio manager is a key player, using his fundamental views in order to smooth the profile of the fund returns in different types of market scenarios and to avoid tail risks.
The fund is structured around a strategic allocation of five bond asset classes including Inflation linked bonds, emerging market debt and High Yield debt. Are these last three markets sufficiently large and liquid? If some assets look overvalued, could you carry out short selling or Credit Default Swap?
Each of the 5 global fixed income asset classes used by the FF Global Strategic Bond Fund are liquid; so liquidity is not an issue given the size of these markets, even for the least traded. For example, the global inflation-linked bond market has an estimated market value of around 2,1 trillion dollars.
I would like to specify that the FF Global Strategic Bond Fund is a long only total return fund, which is not authorized to do short selling. However, the fund could use derivatives like Credit Default Swaps (CDS) or futures contracts, to enhance returns or to reduce portfolio duration.
Kevin Loo
The investors are also scrutinize the size of the fund. In the phase of growth that you experience now with FF Global Strategic Bond Fund, do you pay attention to the maximum amount you are able to absorb and manage without being less flexible?
The fund capacity is very large. Assets under management at the end of September 2012 were 225 millions euros. But, according to me, given its strategies and underlying markets, the FF Global Strategic Bond Fund has no capacity constrain.
Investors seem often lost as they are not able to compare the performance of some flexible funds ... Sometimes managers will try to do better than an index, others to do better than EONIA capitalized ... What do you think investors should look beyond the annual returns of FF Global Strategic Bond Fund?
You are right. With this product, Fidelity looks for a superior risk-adjusted return profile than the global fixed income fund peer group. Through its SAA and TAA, the FF Global Strategic Bond Fund aims two capture stable and constant returns, in all types of market scenarios, especially during major financial crises.
What is your Sharpe Ratio and is it really relevant for FF Global Strategic Bond Fund?
The Sharpe Ratio approach is not really relevant for the FF Global Strategic Bond fund. According to me, the information ratio (IR) is a better indicator to identify the consistency of an investment process. For your information, since inception, the FF Global Strategic Bond fund has an IR of 0,59 vs its strategic asset allocation.
Do you see a growing interest for your uncontrained approach? How FF Global Strategic Bond Fund can be integrated into the overall allocation of an institutional investor and should it replace the traditional bond allocation?
Yes, Fidelity has received a growing interest from investors for the FF Global Strategic Bond fund, especially from the institutional side in order to overcome the benchmark related risks. The sovereign debt crisis has changed the risk perception for institutional investors and this type of solution meets their changing expectations.
