Performance Review 2006
Bernard Lalière: "The 2006 performance of the fund was satisfactory. The fund owed this relatively good performance to the corporate high yield bonds category, which remained strong throughout the year. Economic cycles and growth remained above trend and revenue growth was above expectations. Nevertheless, given the economic slowdown in the United States, we constantly increased our investments in the euro-zone and in Europe since the beginning of 2006, trying to keep our euro exposure to 70% of the total portfolio."Performance Review 2007
Bernard Lalière: "Until the end of May 2007 Petercam L Bonds Higher Yield benefited from the general confidence in the markets. As a result a return of some 5% was recorded prior to the first of a number of corrections from June onwards. The decision taken by the US federal reserve provided a boost, albeit only temporarily. The second crisis, worse than the first, hit high-yield bonds. European high-yield corporate bonds were the principal category in this sub-fund. We nonetheless continued to diversify our investments over public and private bonds from emerging markets and some “exotic” currencies such as the Turkish lira, the Brazilian real and the Icelandic crown. Investments in the US dollar remained largely hedged against currency risk. The average rating of securities in our portfolio is “BB-“, and the average yield to maturity of the portfolio exceeded 9.5% at the end of December 2007. In 2007 the net asset value of the accumulation shares increased from EUR 177.28 to EUR 177.63, a rise of 0.2%."
Performance Review 2008
Bernard Lalière: "Petercam L Bonds Higher Yield had a particularly difficult 2008 and closed the year with a loss of 45%. The spreads on high-yield corporate bonds went up drastically due to the credit crisis, the worsened macro-economic context and forced sales by hedge funds and other financial constructions. The sub-fund suffered from relatively high exposure to bonds issued by smaller companies for which the widening of the spreads was the most pronounced. In addition, the sub-fund had invested about 10% in bonds issued by companies in emerging countries, including some Kazakh banks and South African companies. Until the summer these were holding ground reasonably well, only to take the full blast in the autumn. This was also the case for the roughly 5% invested in bonds of Norwegian offshore oil platforms, which suffered under the nose-diving oil price in the second six months and the weakening of the Norwegian Kroner. The sub-fund also had to cope with a dozen cases of payment default. Thanks to the highly intensified diversification, they only represented a small portion of the portfolio (a little over 5% of the nominal value). In the sub-fund, these problem cases are valued at 5%. In the past, it was still possible to recover on average 30% on such bonds (the so-called recovery rate). According to the manager, a recovery rate of 20% still ought to be possible now. Lastly, the small positions in high-interest currencies likewise had a negative impact on the return. The biggest culprit was the Icelandic Kroner."
Performance Review 2009
Bernard Lalière: "Despite a difficult start of the year Petercam L Bonds Higher Yield achieved an excellent performance in 2009. The net asset value of the accumulation shares (class B) rose by 52.44%.
In the first quarter, the fund manager participated in some new issues of investment grade bonds offering attractive yield, for example Vivendi, AB Inbev, Bertelsmann and Holcim. He also subscribed to the new high-yield issue of Fresenius. In terms of currency allocation, he slightly increased his position in Turkish lira.
On the other hand, the fund manager sold some positions in smaller companies during the first half of the year, more precisely companies with a negative outlook and inadequate free cash flow generation compared to their level of debt. He also reduced his exposure to Kazakh banks. Furthermore, he took advantage of the strong recovery in Tier One financial bonds to decrease their weighting.
As from the second quarter, the primary high-yield bond market recovered strongly. The fund manager actively participated in the new issues and also subscribed to some bonds issued by companies in emerging countries.
In the second quarter, he increased the weighting of defensive companies, for example cable operator Versatel. In June, he bought a position in Gazprom. He also started to progressively take profit on the investment grade bonds bought at the beginning of the year.
During the third quarter, the fund manager maintained the exposure to cyclical sectors and, at the same time, he gradually increased our positions in defensive sectors in Europe. The exposure to PIK (Pay In Kind) bonds diminished, mainly thanks to the buy-back operation of Italian telecom operator Wind. He sold our position in TUI and Avemos, because he has doubts about the management of both companies. At the currency level, he initiated a small position in Hungarian forint (purchase of a government bond) and gradually reduced the exposure to Turkish lira.
In the fourth quarter, he increased the position of certain cyclical companies. On the other hand, he decreased the position in Gazprom and Braskem (chemical company in Brazil). Instead, he bought Lukoil and Vimpelcom (telecom operator in Russia).
Regarding high-interest currencies, he lowered the weighting of the Turkish lira to 0.4% in the middle of November, just before the currency corrected and by the end of the year again increased the weighting of the Turkish lira to almost 1% through the purchase of bonds with short maturities and an inflation-linked bond (maturating in 2012). Turkey is close to an agreement with the IMF and the offered yields (8.5%-9%) are very attractive. He also took advantage of the increased volatility at the end of November to accumulate the position in Hungarian government bonds (denominated in HUF). In December, he decided to partly cover the exchange rate risk of the positions in GBP."
Performance Review 2010
Bernard Lalière: "The net asset value of the accumulation shares (class B) rose by 17.43% in 2010.
The good performance of the sub-fund is attributable to the strong performance of high-yield corporate bonds which benefited from a significant narrowing in spreads (yield differences with government bonds) and to his currency strategy, more precisely the strengthening versus the euro of currencies like the South African rand, the Mexican peso and the Turkish lira.
The fund manager was very selective regarding the abundance of new primary issues. He participated in the issues by HeidelbergerCement, Kerling (chemicals), Interxion (IT), Stena (transport), New World Resources (mining), Ziggo (telecom), Cirsa (gambling), Rhodia (materials), Continental (tyres), Picard Surgelés, ONO (telecom), Sunrise (telecom) en R&R Icecream en Wind (telecom).
In January, he sold TDC. Furthermore, he took partial profit on the Solvay perpetual bond. In its place, he bought a Lower Tier Two bond of Allied Irish Bank. In March, he slightly increased his position in Carlson Wagonlit and CET TV and bought a USD denominated bond of Virgin Media.
In the second quarter, he decreased the weighting of European cyclical companies. In the third quarter, he bought bonds of the Russian telecom operator MTS and Hungarian oil and gas group MOL. He gradually sold his position in Ford Credit Europe.
During the fourth quarter the manager reduced the weighting of companies which have not adequately improved their capital structure. This was the case for Germany’s Pfleiderer, Ireland’s Eircom and Brazil’s beef producers. He also reduced his exposure to Kazakh and Ukrainian banks. He disposed of the entire position in Jamaican government bonds of about 0.5% for a handsome profit given the strong performance of government bonds of emerging countries in 2010. The country suffers from low growth and remains heavily dependent on countries abroad.
On the other hand, he raised his exposure to consumption-related businesses, including Spain’s Campofrio (producer of processed meats), Edcon (retail chain in South Africa) and Cosan (Brazilian sugar producer). Furthermore, in early October he raised his position in subordinated financial bonds (Tier One) from around 3% to 5% through the purchase of bonds of KBC, BBVA and Deutsche Post. However, this position has somewhat weighed on the sub-fund’s return, for the Tier Ones performed less well in the fourth quarter.
In terms of currency allocation, the fund manager increased during the first half of the year his position in Mexican peso (acquisition of long-term government bonds) and Turkish lira (acquisition of short-term government bonds). In March, he initiated a position in Brazilian real (purchase of government bonds with long maturities). Bonds denominated in US dollar and pound sterling are mostly hedged in euro in this portfolio, but in the first quarter the fund manager decided to partly decrease the hedging. In May, he lowered the exposure to the Hungarian forint. In the second half of the year, he gradually sold his his position in Turkish lira. By contrast, he further raised his position in Mexican peso."
Performance 2011 - Year-to-Date
Bernard Lalière and Thierry Larose: "The fund resisted relatively well during the crisis thanks to its good bond picking (focus on defensive names and shorter maturities), in particular the prudent stance versus recent primary issues and the exposure to emerging currencies. Currencies like the Mexican peso, pound sterling, Russian rouble and South African rand strengthened versus euro. On the other hand, the small positions in Hungarian forint and Turkish lira detracted performance."
Performance since 2006
Investment Process and Strategy – How does the Fund Manager invest?
Bernard Lalière and Thierry Larose: "The investment philosophy is based on a total return approach without benchmark. The fund, euro denominated, is a global opportunistic bond fund, which applies a multi asset class approach in high yielding bonds. The team looks for high diversification of the portfolio in terms of individual positions but also in terms of high yield bond types with a large degree of flexibility
The investment philosophy is in line with the general investment philosophy to manage our fixed income portfolios i.e.:
- Active management
- Preference for value: search for undervalued bonds and attractive yield
- Contrarian approach
- Multi asset class
- Risk reward driven approach."
Investment Outlook
Bernard Lalière and Thierry Larose: "The fund manager remains confident about high-yield bonds of European companies, although it will be important to select these issuers very carefully in 2011. In this regard, he intends to gradually improve the average rating of the portfolio (currently corresponding to B-) and he is not buying new positions in CCC rated bonds. Emerging bonds remain an interesting diversification making the portfolio more resilient to market downturns. Within this category, he considers that the local-currency bonds offer a good potential to play the currency as well as take advantage of the attractive yields offered on these bonds."
