Update | R-co Conviction Credit Euro

Fund positioning

In December, the Euro Investment Grade Corporate Bond market posted a slightly negative performance. As a result, 2021 performance was -1.08%, close to the lowest point of the year, the peak to through performance was close to 2%, from August to the end of the year.

In December, interest rates increase had a -74bps negative contribution, but spreads tightening largely compensated with a +66bps positive contribution. Over the year, both ratings and spreads made a negative contribution, -130bps and -66bps respectively, while carry made a positive contribution of 54bps.

In this context, thanks to its defensive positioning on rates, and despite its over-exposure on credit, R-co Conviction Credit Euro posted a significant outperformance, mainly built during the first half of the year, and slightly improved at the year end. As a result of 2021 moves, the Investment Grade market start the year with a 0.48% yield and a modified duration of 5.25, compared with 0.17% and 5.29 one year ago, respectively.

We had a good rally on credit in December, as mentioned above, as Investment Grade and High Yield tightened by 12bps and 33bps, respectively, bringing Investment Grade to widen by 10bps for 2021. The curve has significantly steepened, which amplified the move of rates. Regarding rating, once again we can see a correlation with rates, as better ratings underperformed lower ratings: AA widened 19bps and BBB only 6bps. Across sectors, difference is less clear between them, except a clear gap between cyclical sectors (Industrials, Chemicals, Auto), which showed a better resilience than other sectors. Within financials, higher betas⁽¹⁾ also outperformed, just like subordinated banks and insurance, and the high beta real estate sector. 

In December, the main contributor to the outperformance was the interest rates positioning. Credit positioning was slightly positive, but Alpha⁽²⁾ not. Under the rating angle, the High Yield/Non Rated diversification was a strong contributor, but also over-allocation on BBB ratings (and underweight in better ratings), and bond picking in the overall Investment Grade space. As a result, globally all bets worked under the rating angle. Only the hedge with Xover cost 18bps.

Key figures

• Modified duration: 3.69
• DTS⁽³⁾: 134%
• Yield: 1.34%

Key points of the strategy

• One of the largest credit funds managed from Paris.
• A diversified client base in France and abroad, from Wealth management to Institutional clients.
• A very good track-record along the full cycle.
• A conviction management allowing to do strong bets in order to outperform the benchmark.
• An opportunistic management over the last years:
 - To catch spreads when risk premiums were high and a progressive reduction of the risk over the recent period.
 - To sustain of a low modified duration to avoid the volatility risk of an underlying expensive asset.

Emmanuel Petit & Philippe Lomné

(1) R-co Conviction Credit Euro benchmark
Sources: Bloomberg, Rothschild & Co Asset Management Europe, 31/12/2021.

(1) Beta is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole.
(2) Alpha is a term used in investing to describe an investment strategy’s ability to beat the market, or its “edge.”
(3) DTS : Duration Time Spread