On March 31, Sextant Bond Picking celebrated its 5th anniversary, an opportunity to review the history of the strategy and the current positioning of this fund.
The objective of the fund's launch in March 2017 was to offer investors access to Amiral Gestion's Fixed Income investment strategy, historically developed within the Sextant Grand Large fund or as part of its wealth management. Although the market context at the time, with compressed credit spreads and negative risk-free rates, did not immediately present an obvious opportunity, the Sextant Bond Picking approach could, under these conditions, demonstrate significant advantages. The idea was to offer a strategy with a high degree of flexibility, both in terms of the investment horizon and allocation to all bond segments worldwide. This amplitude of movement in the management allows the selection of profiles that are truly value drivers. The portfolio's potential must, in this logic, be expressed while providing protection to investors. To achieve this, we have put in place the necessary tools: discriminating fundamental stock selection, controlled interest rate risk and allocation flexibility.
Thanks to a shorter and less invested portfolio in 2018, Sextant Bond Picking achieved a slightly positive performance when the high yield credit markets were, for their part, clearly negative. Conversely, when credit market valuations skyrocketed in 2019, the fund was unable to justify such aggressive levels of investment and maintained a rigorous selection of credits that were shorter than the average for the indices. This management choice was punished, that year, by a performance lagging behind these same credit indices. On the other hand, this gave the fund the means to redeploy the portfolio's liquidity during the liquidity crisis of 2020 and to achieve, over the entire period, a performance in line with our expectations, within a controlled risk budget. It also appears that risk control was more effectively achieved through portfolio selection and positioning than through an approach guided primarily by credit ratings.
What is the situation today after 5 years of existence?
The context today is no simpler than when the fund was launched. The high levels of inflation observed post-Covid are now aggravated and perpetuated by the international situation, particularly through commodity prices. The rise in interest rates and the reduction in the balance sheet of central banks, made more pressing by price levels, now present the risk of hampering economic growth. Financial asset values are largely affected by these developments, as are corporate financing conditions, the very foundation of the credit markets. High-yield bonds are thus returning to yields closer to historical averages, and the fund's cash holdings and matured maturities are usefully reused under these more attractive conditions. Sextant Bond Picking's ability to invest in the various bond sub-markets has led it to build up a pocket of inflation-linked bonds. Alongside a portfolio that is shorter and better marked than the indices, this position, among others, offers the fund a means of resisting the current volatility and maintaining a significant performance potential.
Lastly, convertible bonds allow us to participate in the dynamism of the equity markets while maintaining a defensive bond component. Classic out-of-currency convertibles often provide a more attractive return than the simple bond equivalent. In addition to this investment, which is constant in the fund, more recently mixed profiles have been added: their yields are higher than what the issuer's balance sheet would make possible, and the indexation with the underlying stock presents an attractive opportunity. In these uncommon cases, the investor benefits from the protection of a traditional bond as well as from part of the potential of the equity.
Review and outlook:
During those 5 years, the fund has gone through various bond market conditions, with some major events punctuating the period such as: the US-China trade war at the end of 2018, the health crisis in the spring of 2020, or more recently the war in Ukraine. Nevertheless, the fund's strategy has cushioned the shocks and generated a performance in line with initial expectations. Over the period, Sextant Bond Picking achieved a cumulative performance of 14.4% (2.7% annualized), with positive performances every calendar year, thus outperforming the average of the international high yield bond category by 6.4% on a cumulative basis, while maintaining a controlled volatility of 4.9% (vs. 6.4% for the category). The fund's assets under management today stand at €240M.
It seems to us that Sextant Bond Picking's reactive and opportunistic approach continues to prove its relevance in an environment where the stakes are very different from the fund's past periods.
*Source Quantalys, as at March 31st 2022
The above information is for informational purposes only and does not constitute an offer to buy or sell any of the products referenced herein. The information contained herein does not constitute investment advice, an investment recommendation or tax advice. Certain statements and forward-looking information are based on current market and economic conditions, projections, and the opinions of Amiral Gestion.