20 Jun 2014 Nolwenn Le Roux, Head of Credit Satellite, Natixis Credit Opportunities
Nolwenn Le Roux, CFA, joined Natixis Asset Management in 2011 as Head of Credit Satellite. She has been managing the Natixis Credit Opportunities (NCO) fund since its inception in April 2012. Natixis Credit Opportunities is a sub-fund of the Luxembourg-domiciled Natixis AM Funds SICAV.
LUXHEDGE : Could you start this interview with a quick presentation of Natixis Credit Opportunities?
NOLWENN LE ROUX: Natixis Credit Opportunities (1) is an absolute return fund, aiming for a positive return in all market conditions in exchange for some risk-taking. It was launched over two years ago, in April 2012. The fund uses a variety of fixed income arbitrage strategies to achieve its objective of generating at least EONIA + 2% « (part I) » per annum net of all fees. Regarding the risk, we target a VaR (99%; 20 days) of 3.3%, equivalent to an annual volatility of 5%.
I manage NCO with my colleagues M’hamed Fenniri and Cyrille Philippe. We are all senior credit managers with complementary backgrounds: Structured Credit products for M’hamed, Investment Grade for Cyrille, High Yield for me.
We use various strategies which can be grouped in two different families or “buckets.” We believe that these buckets are sources of alpha:
- The conviction bucket (short term horizon, around 6 months) aims to deliver 2/3 of the performance objective. The main strategies used in this bucket are: relative value, directional, credit curve, credit seniority, but also sometimes credit correlation and volatility.
- The carry bucket (longer term horizon, around 2-3 years) aims to deliver 1/3 of the performance objective. This bucket allows the fund to reduce its risk exposure thanks to appropriate analyses of yields with mostly carry and negative basis strategies.
A wide variety of instruments can be used to implement our investment ideas, such as bonds, indices and derivatives; this is a global investment universe covering both Investment Grade and High Yield, with a bit of structured credit.
LH: Could you have a few words regarding the performance of the fund?
NLR: Performance has been strong since inception in April 2012; one of the most meaningful indicators for total return funds is the proportion of positive monthly performance. NCO has seen 85% of positive monthly returns since its inception, which equates to annualized performance of 4.81%, with a volatility of just 1.30%. As a result, the fund’s Sharpe ratio of 3.60 places us among the top funds within our universe (2).
One of the fund’s objectives is to aim to deliver consistent positive absolute and relative performance in all market conditions. We delivered on this objective in most periods with the exception of June 2013. This particular month was difficult since we didn’t expect such a strong movement in interest rates and risk aversion, though we were positioned conservatively and performance recovered quickly. 2012 was also a strong year, with a tremendous contribution to performance from the carry part of the portfolio. In 2013, the credit market began to see more volatility and performance was more diversified across strategies, in particular relative value strategies.
LH: Can you tell us more about the two different buckets and their contribution to the performance?
NLR: Carry and relative value strategies have been the top contributors to Natixis Crédit Opportunities’ performance since its inception in April 2012, contributing 9.29% and 4.09% respectively. These strategies also account for 78.48% of the fund’s net exposure for carry strategies, and 81.53% for relative value strategies. Directional, credit curve and negative basis strategies also added about 1.34%, 0.65% and 0.32% respectively to relative performance. On the other hand, credit seniority strategies detracted from overall performance. However, those strategies account for only a small portion of the fund’s net exposure (5.03%).
LH: Could you tell us how your investment process works?
NLR: The first step of the process is the idea generation. The fund benefits from the experience and knowledge of all the professionals working in the fixed income sector at Natixis AM: our 16 credit managers apply a technical approach while our 21 credit analysts focus on a fundamental approach. We also have 10 quantitative analysts and 1 strategist using dedicated “pricing” tools to evaluate strategies. Any member of the team can come up with a trade idea to implement. Once an idea seems interesting, we compute the potential profit/loss, check its past behavior, and compare fundamentals/technicals in order to calibrate the strategy. Then, we test it to see the impact of its integration within the existing portfolio. We keep a tight handle on strategy-specific and overall portfolio risk by checking each strategy’s contribution to portfolio VaR before implementing it (a single strategy cannot represent more than 10% of the risk budget). The team also sets the appropriate size for the strategy in line with current market conditions and conviction about the idea. Last but not least, we set “take profit”/”stop loss” targets for each strategy, and these are monitored daily.
LH: Can you give us an example of a trade you’ve done in the past?
NLR: Sure. One of our positions on the French market was Long Carrefour/Short Casino. In this specific case, the idea came from one of our credit analysts. Carrefour had suffered from the crisis, most notably in its “hypermarket” sector. In the spring of 2012, a new CEO was appointed and started implementing a strategy that we felt would have positive impact. On the quantitative side, we checked historical CDS levels, comparing spread evolutions between Carrefour and Casino. As expected, the correlation was strong but 2012 showed an important divergence in spreads that seemed to be an entry point. Based on graphical analysis, we implemented a stop loss and a take profit. We also analyzed the impact that such a strategy would have on the portfolio: how would it influence the VaR? Would it maintain the current diversification of the portfolio? Was the idea too correlated with existing positions? Once convinced by the trade, we calibrated the position size , and implemented the trade. Subsequently, we closely monitored the idea daily. When the take profit was reached in December 2012, we closed the position.
LH: How do you manage your risk within Credit Opportunities?
NLR: Risk management is obviously an important component of our investment process. We identify a maximum VaR consumption per bucket, higher for the conviction bucket and lower for the carry bucket. We diversify our investments (in terms of sectors, strategies, countries etc.) in order to lower our risk exposure. A well-rounded understanding of market conditions also allows us to modify the risk taken: when market risk aversion is high, we lower the risk by decreasing leverage, and conversely so.
LH: How do you use leverage within Credit Opportunities?
NLR: This type of fund can benefit from selective use of leverage, especially in a tight spread environment. If risk aversion is low, then we are more comfortable with a higher level of leverage. Two indicators drive our assessment of risk aversion:
- Equity market volatility (usually reacts quickly to poor market conditions and crises).
- The spreads between 5 year Germany and Spain government debt.
Lately, we have also started to track exchange rate movements between the Euro and Emerging Market currencies.
At the moment our volatility is quite low, given the current investment environment, which implies that leverage should be high. However, as we have already reached our performance objective, we do not require additional leverage. Today, Natixis Crédit Opportunities’ net leverage is at 1.1, while our maximum leverage has reached 3.63.
LH: How do you monitor market conditions?
NLR: The team monitors market conditions daily and can react quickly should circumstances warrant. For additional oversight, we hold a dedicated monitoring committee called WOC (Weekly Oversight Committee). It includes the Head of Credit, the Head of Fixed Income, the Portfolio Managers and the quantitative and credit analysts. This is not an investment committee meeting, rather, the purpose is to review market evolution, recent performance and risk indicators, and then discuss potential ideas for the future, in light of existing positions.
LH: What are your market expectations for the coming months?
NLR: We remain extremely positive on the credit market, and we see encouraging signs of economic recovery in Europe. Our Investment Grade and High Yield objectives for 2014 were already reached within the first four months of the year, which is obviously excellent news for us. While carry strategies still offer attractive returns, we continue to focus on relative value strategies with a slight directional bias, and we continue to develop such strategies.
LH: What is your limit in terms of AUM increase and what type of investors are you looking for?
NLR: The fund currently has €78 M in AUM. Given the nature of our strategy, I am quite confident in expanding the size of the fund to around EUR 1 billion without any change to the strategy or the resources in place. We invest in CDS that are very liquid, and we have a broad investment universe at our disposal. The Fund is currently composed of institutional investors with stable flows.
LH: Well, thank you very much and we wish you continued success.
(1) “Performance prior to inception from 14 April 2012 to inception date is derived from the historical performance of Natixis Performance Crédit Opportunités, a French-domiciled FCP authorized by the AMF having identical investment policy and managed by the same Management Company according to the same investment process. Performance has been adjusted to reflect the different expenses of the Natixis Credit Opportunities”
(2) Source: we refer to the “Alt- Long/Short Debt” peer group as published by Morningstar
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