Carmignac Sécurité: Letter from the Fund Manager
Carmignac Sécurité gained +0.57% in the third quarter of 2023, compared with a performance of +0.56% in its reference indicator1.
The bond markets today
European bond yields across all maturities – from 1-day to 30-year – rose again in the third quarter, with the notable exception of the 2-year German yield. The yield curve flattened in the segment between the overnight rate and the 2-year rate and steepened considerably for longer maturities. So far, economic output has withstood the sharp climb in interest rates. This resilience clearly doesn’t mean the economy has become immune to higher borrowing costs, although it is true that several indicators are less worrying today than a year ago:
- Energy and especially gas prices are much lower than in 2022, and reserves appear to be high enough to make it through the coming winter;
- Food prices are no longer a concern;
- The kinks are gradually being worked out of supply chains;
- As a result, disinflation appears to be well under way – proof that the monetary-policy tightening is working.
This suggests that, following the ECB’s two rate hikes in Q3, the short-dated segment of the yield curve should now level off.
But there’s still a way to go before inflation falls to central banks’ target of 2%. And the robust pace of GDP growth isn’t helping. For one thing, the job market is still running hot – not just in the US but, perhaps more surprisingly, also in Europe. And for another, households are still sitting on a large cushion of excess savings, which is fuelling demand for both goods and services. More problematically, the long-awaited slowdown in inflation is starting to boost households’ real incomes, supporting GDP growth in the process. The rate cuts that would justify a highly inverted yield curve have therefore become less certain and less urgent, and the elevated level of long-term yields reflects the fact that central banks will likely keep their policy rates “high for longer” (as opposed to the “higher for longer” mantra heard in previous quarters). Looking at the German yield curve, the rate on 10-year paper rose 44 bp in Q3 while that on 2-year paper was flat.
Other segments of the fixed-income market were weighed down in the third quarter not so much by recessionary fears, but rather by the central-bank rate hikes (and thus the resilient economic growth). The higher rates pushed up credit spreads on non-core sovereign bonds in particular. The spreads on Italian over German yields have been widening since mid-August – partly because they’re coming off a particularly narrow base, but also due to communication missteps by the Italian government (such as with the windfall tax on banks), Italy’s lofty fiscal deficit, and the broad-based climb in interest rates. This is despite the fact that Italian savers generally treasure their government bonds – the BTP Valore issue in June raised over €18 billion among retail investors. The spread on Italian 10-year bonds ended the quarter at nearly 200 bp.
In corporate credit, the typical “summer carry trade” was a no-show this year. The spread on high-yield bonds hovered between 387 bp and 443 bp in Q3 and closed at around 427 bp (as measured by the iTraxx Crossover index).
Performance
Our return in the third quarter was driven mainly by our carry strategies, coupled with an average yield-to-maturity of over 5% – the highest it’s been since the sovereign debt crisis. Carry strategies should remain our primary performance driver in the coming months. That said, our portfolio was impacted by the September rise in long-term yields and, to a lesser extent, by the widening of spreads on Italian sovereign bonds.
Positioning
Our modified duration was largely flat in Q3, staying in a range of 3.0–3.2. But the components of this duration changed substantially.
- Once investors had fully priced in a 4% terminal rate, we concentrated our portfolio on <5-year maturities, mostly in the 0 to 3.5-year segment. We either sold or hedged our long-term holdings and replaced them with short-dated paper.
- In a more marginal move, we shifted some assets out of German Bunds and into non-core sovereigns, as the latter seem well-protected in the short-dated segment considering the current level of yields and spreads.
- Our corporate credit book, which accounts for around one-third of our interest-rate exposure, was mostly unchanged in the quarter and is still focused primarily on short-term debt. Financials, the energy sector, and CLOs remain our three strongest convictions in this market segment.
- We increased our allocation to money-market instruments to nearly 25% of our portfolio. They offer the low volatility and attractive absolute interest rates that are a key feature of Carmignac Sécurité.
We believe that carry strategies will remain our primary performance driver in the coming months and that the central-bank tightening has peaked, meaning we shouldn’t be impacted by additional rate hikes (like we were in the previous 18 months). Our yield-to-maturity at end-September was 5.4%, and our portfolio had an A– average rating.
Source: Carmignac, 30/09/2023. Performance of the AW EUR acc share class ISIN code: FR0010149120.
1Reference indicator: ICE BofA ML 1-3 ans All Euro Government Index. Past performance is not necessarily indicative of future performance. The return may increase or decrease as a result of currency fluctuations. Performances are net of fees (excluding possible entrance fees charged by the distributor).
Carmignac Sécurité
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