Marketing communication for professional investors only

Alpha generation is more stable when quant and discretionary macro are combined

François Collet, Portfolio Manager, Deputy Chief Investment Officer, DNCA Finance

Investors who survived 2022 unscathed typically had a core fixed income allocation which could take advantage of both rising and falling rates. Long-only bond investors were hit hard in 2022. Yields soared as central banks worldwide reacted – at different paces – to a spike in inflation led by energy prices.

The investors who survived unscathed typically had a core fixed income allocation focused on absolute return approaches. That is, approaches that can take advantage of both rising and falling rates.

Arbitraging Highly-liquid Fixed Income Assets

The absolute return investment approach of DNCA Finance, an affiliate of Natixis Investment Managers, traces its roots back to the last major bonds crisis, which erupted in Europe in the aftermath of the Great Financial Crisis. «We had been investing in government bonds for a long time and it became clear to us of the importance of managing bonds in a way that had little or no correlation to markets,» says François Collet, portfolio manager and deputy CIO at DNCA Finance.

DNCA Finance selects assets from the entire spectrum of liquid fixed-income securities and arbitrages between them depending on the assessment of value at any given time. The emphasis is on asset allocation, as opposed to security selection, with a particular focus on finding value in government bonds – including inflation-linked bonds.

The volatility of high yield, he notes, can vary between 10 percent and 2 percent from year to year. Collet says: «This means you potentially face five times the risk this year compared to last year. That doesn’t happen in government bonds, where it’s easier to calibrate risk.»

Another advantage of investing in government bonds is they are highly liquid, which gives DNCA Finance the flexibility to change course swiftly and at a relatively low cost. Liquidity proves its worth when markets alter their course rapidly.

Macro and Quant in Tandem

The asset allocation of Collet and his colleagues is the output of a process that allies macro views with a quant process. Even Central Banks can get the macro-outlook wrong, so the DNCA Finance team prefers to second-guess its predictions, combining discretionary views with a quant process.

«This combination is our competitive edge in this market,» says Collet. «Our quant process has almost never disappointed us in ten years of using it.» The discretionary component harnesses the experience and knowledge of the portfolio managers and relies on four pillars of research and analysis: growth, inflation, monetary policy, and fiscal policy.

The quant analysis is performed by an uncertainty measurement tool, known as the RATP (Risk Adjusted Term Premium). The RATP is DNCA Finance’s revisited Sharpe ratio and is used to assess the attractiveness of duration risk premium, inflation, foreign exchange and other key measures of value.

 
(Click to enlarge)

The key difference between the RATP model and the classic Sharpe ratio is that the RATP has a horizon of more than three years. «Monetary policy expectations only go out three years,” says Collet. «It was evident to us that no one has a clue about the macro environment beyond that horizon. This is where the model comes into its own.»

Collet says: «Combining our quant model with macro insights means we are neither simply macro discretionary nor a quant manager. We are both, which gives us more alpha generation stability.» DNCA Finance considers the full universe of bonds, across both developed and emerging markets. «The wider the universe, the more opportunities you have and the more stable the performance,» Collet adds.

  • To find out more here.

Opinion of the management team as of 28/02/2023. This is not an investment recommendation.

This material has been provided for information purposes only to investment service providers or other Professional Clients or Qualified Investors and, when required by local regulation, only at their written request. This material must not be used with Retail Investors. It is the responsibility of each investment service provider to ensure that the offering or sale of fund shares or third party investment services to its clients complies with the relevant national law. To obtain a summary of investor rights in the official language of your jurisdiction, please consult the legal documentation section of the website here.  In Switzerland: This material is provided by Natixis Investment Managers, Switzerland Sàrl, Rue du Vieux Collège 10, 1204 Geneva, Switzerland or its representative office in Zurich, Schweizergasse 6, 8001 Zürich. The above referenced entity is a business development unit of Natixis Investment Managers, the holding company of a diverse line-up of specialised investment management and distribution entities worldwide. The investment management and distribution subsidiaries of Natixis Investment Managers conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions. It is the responsibility of each investment service provider to ensure that the offering or sale of fund shares or third party investment services to its clients complies with the relevant national law. Although Natixis Investment Managers believes the information provided in this material to be reliable, including that from third party sources, it does not guarantee the accuracy, adequacy, or completeness of such information. The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. This material may not be distributed, published, or reproduced, in whole or in part. All amounts shown are expressed in dollar unless otherwise indicated. Natixis Investment Managers may decide to terminate its marketing arrangements for this fund in accordance with the relevant legislation