ADVERTORIAL INSIGHT INVESTMENT
“
By looking at the
relative attractions
of each part of the
fixed income world,
and assessing the
risk/reward profile
of each, we aim to
target and exploit
anomalies right
across the credit
spectrum
”
Alex Veroude, head of credit,
Insight Investment
BY ALEX VEROUDE,
HEAD OF CREDIT,
INSIGHT INVESTMENT
Credit market performance
was very strong in 2009.
The overall market now
looks less compelling, but
we believe that there are
still pockets of value in
the market. Funds taking a
selective, flexible approach
should still be able to produce
good returns in 2010.
Our analysis shows that
markets are now closer
to fair value, albeit with
some selected areas of
opportunity. General credit
market exposure may have
been enough to generate
Seeking the right
returns in credit
strong returns last year, but
2010 will require a more
focused approach and
we are expecting returns
to be driven more by
carry than further spread
compression.
l Beyond benchmarks
While the alpha-based
credit strategy used by the
Absolute Insight Credit Fund
can add value throughout
the investment cycle, we
feel it is particularly appropriate
at present. By looking
at the relative attractions
of each part of the
fixed income world, and
assessing the risk/reward
profile of each, we aim to
target and exploit anomalies
right across the credit
spectrum. This means that
we will completely avoid
areas or sectors where we
believe the potential return
does not compensate for
the risk taken.
We identify two sets of
positions: one set to protect
downside risk and another
set to maximise upside,
combining best ideas from
across the credit spectrum
by employing a broad
range of credit-trading
strategies such as positive
or negative carry, momentum
(long or short credit),
special situations, capital
and market structure arbitrage,
tactical macro and
basis trades, as well as risk
hedging techniques.
Investment techniques
permitted by Ucits III
legislation makes isolation
of an alpha opportunity
simpler. But using derivative
instruments requires
a robust risk management
framework, a strong investment
process and a modern
operational platform.
As fund manager, I head
a large team of over 18
credit specialists forming
part of one of the UK’s
largest fixed income teams
who input a broad variety
of investment ideas to
the fund. We are further
supported by a specialist
derivatives capability managing
over £60bn (as at 31
Dec, 2009) and a robust
risk framework, assisting
the generation of attractive,
repeatable, risk-controlled
returns that are largely
attributable to credit alpha.
l Credit themes
There are several areas of
the market where we currently
feel there is significant
mis-pricing of assets.
The first of these is assetbacked
securities, an area
we believe selectively
offers attractive yield relative
to the amount of risk,
particularly in prime residential
mortgage-backed
securities (RMBS).
We think market
research coverage is generally
poor in this sector,
providing an advantage to
investment managers with
specialist research capabilities
who do not need to
rely entirely on the rating
agencies. Although this
area has performed strongly
in recent months, there
are still opportunities to
pick up attractive securities
at very good yields.
In 2009, we primarily
used credit default swaps
(CDS) as portfolio protection.
However, as the
market conditions have
altered, we are increasingly
using these instruments
as a source of alpha in
their own right. For example,
we have been buying
CDS (i.e. protection) on
a number of peripheral
eurozone banks this year.
This strategy has generated
good returns given concerns
about the strength of
these economies.
Another theme we are
looking at is leveraged
loans. Loans are relatively
high in a company capital
structure compared with
high yield bonds. While
there are opportunities in
both markets, loans are
lower risk and have the
additional benefit of being
floating rate instruments,
making them immune to
underlying movements in
the yield curve. This is
attractive at a time when
bond yields are likely to
remain volatile.
l The fragile recovery
2010 is likely to see a
continuation of the global
recovery but with this
remaining somewhat fragile.
Company defaults
appear to be lower than
the market was initially
expecting and interest
rates should remain low.
While this is a supportive
environment for credit, the
initial broad-based phase
of the market recovery is
now over, and investors
are likely to become much
more selective.
We believe the flexible
nature of our strategy is
therefore highly suited to
market conditions in 2010.
34 PORTFOLIO ADVISER [www.portfolio-adviser.com] MAY 2010
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