Absolute Return Government Bond Fund

Best Performing Fund Over 2 Years

Originally published in the February 2013 issue

The GBP 720m Ignis Absolute Return Government Bond Fund is designed to deliver 5% a year over cash rates, and to do so independent of movements in bond and equity markets. Those aims have been attained, with returns of 5.74% in 2011 and 6.78% in 2012, an information ratio of 2, and low correlations with other asset classes. The fund can take directional views on interest rates, but there is no long or short bias over time. The fund also gives investors access to a repertoire of traditional global macro hedge fund trading strategies, combined with daily dealing and the layers of risk control entailed in the UCITS structure and Ignis’s own risk management. This includes active management of the fund’s positions on an intra-day basis to limit the downside risk. Head of rates Russ Oxley, who has a strong long-only track record at Ignis going back to 2005, leads a team of eight portfolio managers, who manage £19.7 billion. Chief investment officer Chris Fellingham, who once headed the London office for Soros, and was also global head of fixed income at Blackrock, has general oversight of the firm’s £67.8 billion of assets, including this fund.

Macro views come partly from chief economist and co-manager Stuart Thompson, who recently opined on house blog www.ignisratesviews.com, “We are now halfway through the VILE decade, typified by Volatile Inflation and Limited Expansion”. Volatile levels of current and expected inflation can feed into trades for the fund and recent positions have been taken in 25-year inflation swaps, starting 25 years from now.

The Ignis rates team, including co-manager Paul Shanta, view bond markets through the lens of their proprietary forward rate analytics system, ClearCurve. The techniques were developed by Oxley and by co-portfolio manager Adam Purzitsky, who noticed that forward interest rates are far less correlated than spot interest rates. This forward rate framework has been used since 2005, and throws up trade ideas that might not be picked up by conventional approaches. ClearCurve slices and dices the yield curve into any number of segments, giving greater insight into market pricing, leading to superior portfolio construction, and at times identifying quirks in the curve that become actionable trades. The system then automatically calculates the exact bonds needed to put ideas into practice, saving the fund managers precious time. ClearCurve is also a core risk management tool, along with UBS Delta which calculates Value at Risk and Front Arena which measures real-time risk round the clock.

US, UK and German government bonds and their derivatives are the main markets traded, with other major G10 markets also closely watched for opportunities, while corporate credit risk is avoided. The house blog has suggested that French government debt should trade at a higher yield relative to German paper. That type of view could translate into a pair trade going short of French and long of German government bonds. Recent successful trades have included going long of short-dated bond volatility and shorting short-dated interest rates, both of which profited from the New Year sell-off in government bonds. In currencies, the Yen has been shorted. All of these trades, and others that can involve swap rates or inflation are intended to show low correlations to each other. Diversification benefits amongst these different trades result in overall fund volatility being well below the sum of the standalone trade volatilities.

Going forward, market volatility usually brings opportunity for macro trading. The team are well aware that when Quantitative Easing comes to an end there may be a big market impact, and this scenario and others are regularly stress tested. The fund began 2013 with a short bias that could profit from a pick-up in growth – but this liquid, nimble fund can always swiftly exit or reversea trade. As it seeks to expand its franchise, Ignis is planning to launch a Global Macro Government Bond hedge fund in the second quarter of 2013 that will be managed by the same team and along similar principles as the successful Absolute Return Government Bond Fund. The fund will target a higher return with a higher level of controlled risk than its predecessor.

Fund manager: Ignis Asset Management
Portfolio managers: Russ Oxley, Adam Purzitsky, Senior Quantitative Portfolio Manager, Stuart Thomson, Chief Market Economist and Paul Shanta, Portfolio Manager