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Taking the sting out of things

 “In a world of low yields and considerable uncertainty, limiting downside risks will prove just as important as capturing upside potential”

Mark Munro

Portfolio Manager, Total Return Credit Fund

We expect every bond we select for the Total Return Credit Fund to outperform over the long term; however, there are times when it is impossible to separate alpha and beta in the short term. Few bonds are immune during a broad credit market sell off and even a well-diversified portfolio of carefully selected bonds can be exposed to material downside risk. 

However, consistently anticipating turning points in the market is not a sustainable approach. This is why we hardwire protection into the Total Return Credit Fund. Embedded in the portfolio are a set of strategies with the express purpose of dampening volatility and reducing drawdowns. By having risk protection ever present, we are under no obligation to try and pre-empt shifts in investor sentiment. Each strategy is carefully tailored to reflect the risks in the Fund’s credit portfolio and is sized accordingly.

There are three distinct pillars to this protection.

  • Credit exposure – we tactically adjust our credit exposure between 85% and 100% of the Fund’s NAV depending on our view of credit markets.
  • Insurance – we use option-based volatility strategies across various asset classes that will benefit performance when volatility rises.
  • Portfolio risk dampeners – a set of macro fixed-income strategies with a low or negative correlation to credit, such as interest rate swaps or foreign-exchange positions.

For example, we might hold Swedish government bonds, which would rally during periods when credit and risk in general sells off.

More of the upside, less of the downside

Importantly, this downside protection should not be viewed as a prohibitive cap on performance. We have conviction in the rationale of each strategy; not only should they benefit returns when credit underperforms but nor should they detract from returns when credit markets are strong.

This innovative approach has been the catalyst for one of the Total Return Credit Fund’s most important characteristics – an asymmetric risk/return profile. Since inception, the Fund has captured 96% of the upside in credit markets, while only participating in 73% of the downside*. In other words, investors have been able to enjoy a smoother return journey without having to sacrifice return potential. 

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*Source: Standard Life Investments, Barclays, JP Morgan, 1 October 2014 - 30 June 2017 as measured against a Global Credit Multiverse - 33.3% Global Corporate Index, 33.3% Sovereign EMD Index, 33.3% Global High Yield Index

The Total Return Credit Fund aims to deliver a return of 6-8% per annum over the course of a market cycle with reduced volatility and tailored drawdown protection. The Fund invests across a broad global credit universe and combines the proven security selection expertise of our Global Credit team with bespoke risk-management techniques.

The Fund aims for an optimal risk-adjusted return relative to global corporate bond markets by fusing the strong return potential of our best global credit ideas with tailored strategies designed to limit the impact of adverse market conditions. The Fund can bring genuine diversification and growth benefits to a wider fixed income allocation.

The value of an investment can fall as well as rise and is not guaranteed. An investor may get back less than they put in. Past Performance is not a guide to future performance. The fund uses derivatives extensively to meet its investment objective and for the purpose of efficient portfolio management.

This article was provided by Standard Life Investments and does not necessarily reflect the views of Citywire

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