Advanced
Fixed Income:
designed to profit
from market
inefficiencies under
risk constraints
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BONDS
The historically low-yield environment challenges investors’ expectations for positive
returns in most fixed income asset classes. After several years of loose monetary
policy, investors wanting to compensate for this lack of returns may choose to either
reposition their portfolios, to broaden their investment universe, or both.
Fixed income markets display inefficiencies that can be systematically exploited to the advantage of our investors. Our first objective is to generate long-term value measured in terms of performance against the investor’s benchmark. The outperformance is achieved through carefully selected active positions, deeply rooted in our research approaches. Our research is structured in a way that enables us to simultaneously offer a broad coverage and deep insights: we call it Advanced Analytics.
Markets are asymmetric: risk is more strongly penalised in bad periods than it is rewarded in good ones. Therefore our portfolio construction is based on stringent risk guidelines, and aims to avoid credit deterioration, which is achieved by a systematic optimisation process. The Advanced Fixed Income strategy follows a smart, active and disciplined management style to deliver superior risk-adjusted returns through a four-step investment process (see Chart 1 ).
However, in a context of low yields, the traditional dilemma between risk and return is exacerbated, as those risks are less rewarded on an absolute basis than in previous cycles. For institutional investors in particular, who need to meet their asset liability objectives, the ability to generate a stable outperformance whilst taking those risks into account is paramount given the length of the current low yield cycle.
Advanced Fixed Income is Allianz Global Investors’ solution for global risk constrained investors in fixed income markets. Where most asset managers try to maximise the mere performance of investments, Advanced Fixed Income aims to optimise the risk-adjusted performance of our investors’ portfolios. Advanced Fixed Income is a highly differentiated strategy designed to identify and exploit market inefficiencies in global fixed income markets.
Step 1: Research
Our first goal is to gain an information advantage by developing an in-depth understanding of the risks embedded in a security. For the Advanced Fixed Income strategy, the primary source of research is Allianz Global Investors’ Advanced Analytics. The tool is based on advanced proprietary quantitative models, which allow us to understand the complex relationships between numerous economic variables and enables us to reduce the complexity of these
relationships in order to make them more palatable and concrete. We recognise that classic quantitative approaches can be poor in predicting structural breaks in economic relationships, especially during severe crises. This is due to the fact that many models try to capture the factors that were particularly good at explaining past events and, therefore, ignore indicators that may be relevant for future crises. Our response to this shortcoming is to take a different view on the markets, and constantly challenge what we observe by innovative models.
Using Advanced Analytics, we consider (see Chart 2 ): · Global sovereign bonds: with our proprietary research, we
analyse the ability, and the willingness to pay, of 80 sovereign issuers.
· Global covered bonds: our research covers the legal framework, macroeconomic environment, standalone issuer strength and covered pool quality of covered bonds issuers worldwide. · Global corporate bonds of financials and non-financials: we
systematically analyse the fundamental strength of global corporate issuers to obtain risk-clustered classes of corporate bonds. This feeds into our Rich/Cheap Analysis tool, which measures the attractiveness of individual bonds along the yield curve.
· Global Securitised: we cover over 1,000 transactions of securitised issuance, including ABS/MBS in Europe and the US.
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01 THE ADVANCED FIXED INCOME PROCESS IN FOUR STEPS
Active
Management RiskManagement
State of the art methods for non-conventional market analysis
Active Positioning Process
Monthly Positioning Documentation for PM*** Integration of active strategies & risk requirements
Insights
Monetary Policy 1. Universe Analysis · Risk Decomposition · Liquidity Analysis 2. Funds Positioning · Allocation Safe Spreads Tactical Allocation · Selection Security Selection Primary Markets Covered Bonds TE / VaR DVaR / CVaR*, ** Risk Optimisation Risk Controlling Yield Curve Bank Bonds
Duration Currencies Corporate Bonds Inflation-linked Bonds Volatility Emerging Countries
High Yield Bonds
Swaps Expert Implemen-tation Best-Execution Investor’s opti-mised portfolio 4. Trading 3. Portfolio Construction According To
Individual Investor Requirements 2. Market Analysis
1. Research
* TE: Tracking Error, VaR: Value at Risk, DVaR: Dynamic VaR, CVaR: Conditional VaR. ** Benchmark & risk constraints are determined by the investor / ALM Manager. *** PM = Portfolio Manager.
Systemic risks, for example, are those related to monetary policy of developed countries which may affect short-term interest rates, the shape of yield curves, market volatility and currency movements, and which have an impact on emerging bond markets. Specific asset class risks relate to market segments: covered bonds for collateralisation risk, banking sector bonds for financing risk, corporate bonds – investment grade and high yield – for credit risk, inflation-linked bonds for break-even risk, or swaps for funding risk. Our positioning methodology has evolved over time. In particular, we believe our positioning needs to reflect the fact that yield curves can be very different, both between and within regions. Therefore, we take a granular approach to duration management, and provide a positioning for each maturity bucket within each country. In doing so, we define partial duration bets that sum up to the total duration of the portfolio.
The second important objective of our positioning process is diversification. Since diversification of active positions stabilises the long-term expected information ratio, we may use non-benchmark assets to add value and stability to the strategy.
rating structure, industry classification exposure for corporate bonds, etc. We also analyse the liquidity of the benchmark itself. This comprehensive analysis allows us to develop a detailed understanding of the risks associated with each investor’s benchmark, and provides a foundation from which we can seek to add value. Based on this analysis, we overlay the benchmark with tactical positions to provide a customised active portfolio, taking into consideration an investor’s specific investment guidelines and risk constraints. We are convinced that our ability to accommodate a wide range of investor constraints, such as duration, credit and specific exclusion criteria, is a key strength of our approach. Risk optimisation forms a vital part of portfolio construction. We use a quantitative process to extract the maximum performance for each element of risk. Typically, risk is expressed in terms of contributions to tracking error of the different market segments (country, maturity bucket, sector). However, given the flexibility of our process, we are able to construct portfolios against any risk measure, including tracking error, Value at Risk, Conditional Value at Risk or Maximum Drawdown.
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AFI offers a truly global coverage across
This map represents the countries covered under the sovereign risk analysis. Single Framework – Global Coverage
· 80 countries under sovereign risk analysis
· 101 SSA issuers (Supranationals, Sub-sovereign & Agencies) · 400 approx. investment-grade non-financial corporate issuers · 30 non-investment-grade issuers
· 33 insurance companies · 190 banking institutions · 220 cover pools
· 1000 approx. securitised transactions (ABS/MBS)
all asset classes and market segments. Region Euro Aggregate Sovereign Covered/ Securitised IG Corporates Emerging Markets Uni ver se
US Global Euro US Global Euro US Global Euro US Global
Strategy Absolute Return B&W EFI AFI
Advanced FI Portfolio Management
Single Approach – Polymorphic Strategies
· Absolute Return: target return defined as EONIA/LIBOR + xx bps · Buy & Watch (B&W)
· Enhanced Fixed Income (EFI): lower tracking-error strategy · Advanced Fixed Income (AFI): higher tracking-error strategy
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we aim to determine for a given maturity segment which bonds are more attractive and should be bought, and which are less attractive and should be sold. The additional expected return lies between five and 20 basis points per annum, depending on market conditions. We also seek to capture primary market premia by participating in IPOs.
Step 4: Trading
Trades are executed by our Fixed Income Trading Desk in Frankfurt. Our traders work with local and regional brokers, and are specialists within their region. They have developed deep insights to better understand the overall market conditions and regulatory environment, as well as sector and country-specific movements of securities in their local markets.
A Strategy with Tradition
The roots of the Advanced Fixed Income strategy can be traced back to 1999, with the inception of Enhanced Fixed Income portfolios. The philosophy and process supporting this strategy were enhanced to develop the Advanced Fixed Income strategy, which was launched in 2008 to capitalise on changes in the regulatory framework, and Allianz Global Investors’ strengths in sovereign and credit analysis.
As of May 2015, the Advanced Fixed Income team consists of 16 portfolio managers, with an average investment experience of 12 years. The team is headed by Maxence Mormède, Chief Investment Officer (CIO) Advanced Fixed Income who, while
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Maxence Mormède is Chief Investment Officer (CIO) Advanced Fixed
Income by Allianz Global Investors. He joined the group in 1999, with responsibility for research and fund management within the Portfolio Management Quantitative Products department. He specialised in Fixed Income and Guaranteed products. In 2003 Maxence was named Head of the Multi-Asset Protection Team. In 2011 he founded the Advanced Fixed Income Team in Frankfurt, which offers a broad spectrum of investment solutions in global sovereign, covered and corporate debt and currencies for institutional and retail investors. Maxence studied Mathematics, Business and Economics in Toulouse, Paris, Oxford and Berlin, and gained the Diplôme de Grande Ecole de l’ESCP Europe, a Master’s in Management, the Diplom-Kaufmann, as well as the Diplôme d’Etudes Approfondies in Mathematical Economics and Econometrics. He is also a CFA Charterholder.
Yann Netois the product specialist of the Advanced Fixed Income Team.
He joined Allianz Global Investors in June 2013. Yann started his career in Credit Trading in 1999 as a market marker in the Financials Credit trading team at Natixis in Frankfurt, and was in charge of pricing and managing risk on all fixed income instruments. He then joined Mitsubishi UFJ securities Intl Plc in London as a proprietary trader in 2004 with the responsibility for Euro-denominated fixed income bonds, and covering multi-currency relative value trading portfolios. Yann also has experience in bond broking at Icap, London and BGC, Paris. Yann also holds a Master’s degree from Université Paris X in Money, Bank and Finance with honours.
portfolios are managed on a team basis, is ultimately responsible for the management of all accounts under his supervision. The investment professionals in this team are both portfolio managers and research analysts. Continuous research and development effort ensures that we stay at the forefront of value generation and risk management. The team has a depth of proven
investment and quantitative modelling experience, and extensive complementary skills including fixed income, currency, risk management, quantitative research, fiduciary management and capital protection.
Since inception, the strategy has delivered superior risk-adjusted performance in all fixed income asset classes. It has invested in and generated outperformance in 14 of the last 15 years for our investors, across various market cycles. Advanced Fixed Income is our solution for global risk constrained investors in fixed income markets.
