Ignis Asset Management

Rolling out macro, credit and emerging rates strategies

Originally published in the November 2013 issue

Ignis Asset Management is owned by London-listed Phoenix Group, the UK’s largest closed life and pension fund consolidator. Although Ignis manages £54 billion of predominantly captive assets on behalf of Phoenix Group across multiple asset classes, its revenues from external investors are growing fast. Total third-party assets have doubled over the past three years and now stand at £13 billion. More recently, the award-winning, daily dealing, UCITS-compliant Ignis Absolute Return Government Bond Fund (ARGBF), has added impetus to this growth, more than doubling assets this year to pass the £1.5 billion milestone.

Chris Fellingham, CIO, has played a pivotal role in helping to drive third-party growth since he was lured away from running Soros’s London office. When Fellingham took the helm in 2010 Michiel Timmerman, CIO of Ignis Advisors, was hired at the end of the year from the former Coutts and RBS Asset Management fund of funds business that he had co-founded in 1998, leaving shortly after its acquisition by Aberdeen Asset Management.

Absolute return, active oversight and alpha
When plotting their strategy, Fellingham and Timmerman – who had crossed paths before – agreed that “the [traditional] fund management industry had not served investors well, generally offering poor performance, high fees, or both,” Fellingham says. Ignis offered the duo a chance “to do something different”.

A meeting of minds between Chris Fellingham, Michiel Timmerman and Ignis CEO, Chris Samuel, helped to bring the three of them together at Ignis in 2010. The trio agreed with a kind of “new normal” thesis that said economies were set for “a prolonged period of slow growth” and that investors could not rely upon market beta, which is difficult to predict at the best of times according to Fellingham. They recognised the need to focus on absolute return products. This strategic repositioning was one of Fellingham’s first moves at Ignis.

Fellingham insists that in contrast to the straitjacket of long-only management, absolute return mandates offer managers more freedom. This view alludes to Grinold and Kahn’s Fundamental Law of Active Management, which states that a broader investment universe increases scope for alpha generation. For example, the Ignis Gilts fund, which allocates to gilts and cash, has generated a very respectable Information Ratio of 0.7. Adding some hedging tools and allowing up to 20% overseas exposure has enabled Ignis’s LDI solution to achieve an information ratio of 1.2. The full flexibility (albeit within UCITS constraints) that ARGBF enjoys has raised the ratio to a most impressive 2. So, the additional freedoms that Fellingham has given his team have clearly elevated the information ratio into another echelon altogether. Fellingham envisages that investors will increasingly focus on these measures of risk-adjusted returns, such as Information and Sharpe ratios, rather than just raw returns. Fellingham’s conviction that hedge fund management is easier than conventional long-only management was, he thinks, something that helped him to land the job at Soros, when he interviewed with multiple Soros managers in New York and then had “two very good years” there.

If inefficiency is the lifeblood of active fund management, today’s financial markets exhibit it in spades. Fellingham reflects that he can “rarely remember an investment time when markets were so manipulated, or rigged by QE. What that means is it’s hard to predict beta or direction as it is entirely dependent on central bank rhetoric.” Rather than try to be on the right side of these capricious market moves, Ignis “wants to build an absolute return business producing alpha whether markets are up or down”. Once Ignis has provided this “portable alpha”, clients can then append it to their chosen flavour of beta.

Fellingham argues that Ignis has competitive advantages in fixed income, some equity markets, and alternatives. Ignis has always had the vast majority of its assets in rates and credit, which has “allowed us to invest in developing proprietary systems such as our cutting edge ClearCurve tool,” he says.

ClearCurve – a competitive advantage
Ignis chief economist Stuart Thomson recalls that the Bank of England first started applying forward rate analytics to government bond curves. Although the Bank has been a nursery school for many City economists, remarkably few asset managers are actually using forward rates according to Ignis. Indeed, Chris Fellingham says that they were not even being used on government bonds in a comparable way at his previous employer, Blackrock, one of the world’s biggest bond managers. The Ignis rates team, including co-manager Paul Shanta, says that the way in which Bloomberg fits forward curves fails to highlight many real opportunities. Ignis likes to view bond markets through the lens of their proprietary forward rate analytics system, ClearCurve, which acts as a competitive information advantage in many respects and is not available to any other asset managers.

The techniques were developed by Russ Oxley, head of rates, and by co-portfolio manager Adam Purzitsky, who noticed that forward interest rates are far less correlated than spot interest rates. Ignis argues that managing using forward rates within the same government bond market brings far greater diversification benefits than allocating to an overseas government bond of the same maturity. The reason is simply that correlations between government bond markets of different countries, at the same maturities, have lately been far higher than those between different maturities within the same market. Using forward rates also creates plenty of trading opportunities. In the space of just one month Ignis frequently observes that different forward rates have moved in opposite directions. There may therefore be times when the 10-year spot rate, which is the average of the individual forward rates up to 10 years, has not moved, but Ignis can make money because they are trading the individual one-year forward rates, some of which have risen and some of which have fallen.

This forward rate framework has been used at Ignis since 2005, and throws up trade ideas that might not be picked up by conventional approaches. ClearCurve decomposes 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.

One example was a brief period when forward rates at a particular point on the curve went negative. Whereas this event was a barely discernible blip on the smooth path of the zero coupon curve, the unusual plunge into negative territory was clearly visible to Ignis, and the manager swiftly profited from the reversal of this anomaly. The ClearCurve system can automatically calculate the exact bonds needed to put ideas into practice, saving the fund managers’ precious time. ClearCurve also provides very precise exposure breakdowns, all the way down to basis points of risk at each segment of the forward rate curve. It lets Ignis instantly check that exposures are consistent across different funds. ClearCurve further allows Ignis to stress-test trades for the impact of historical scenarios including the 2008 crisis, and various incarnations of QE from QE1, to QE2, to QE3 and also Operation Twist.

The confidence Ignis places in ClearCurve is illustrated by the hard data they display each month showing performance attribution. Since launch in April 2011, short-dated, medium-dated, and long-dated forward rates have together contributed 9.12%, or nearly half of the fund’s 18.41% profit. The other four strategy buckets have also been profitable. The second largest contributor was volatility trading, making 3.59%, with inflation-related trading in third place at 2.42%. Trading bonds from different angles has helped Ignis profit from the bond market swoon in two ways: they were directionally short, and being long of bond volatility also profited from the heightened turbulence associated with the sell-off.


The seven sub-strategies are so different in terms of return profile that they greatly reduce overall fund volatility. Adding up the standalone volatilities of each strategy at the end of August would have resulted in a total figure of 12.6%, if they were all perfectly correlated, but the diversification benefit has reduced actual fund volatility down to 4.7%. Ignis has been pretty accurate at forecasting volatility for the strategy: its realised, or ex post, volatility of 4.2% has slightly undershot the forecast, or ex ante, level of 4.9%. As well as ClearCurve, at Ignis risk management software includes Barclays Point, which calculates Value at Risk as well as tracking error, and Front Arena, which measures real-time risk round the clock.

Bespoke advisory multi-manager solutions
Michiel Timmerman’s multi-manager business, Ignis Advisors, also makes use of quantitative analytics, run by Andreas Schroeder. The advisory business contains several sleeves and is currently mainly running internal money. A £720 million fund of hedge funds with quarterly liquidity is invested in funds across the full range of hedge fund styles and strategies – long/short, event-driven, macro, credit and relative value. There is also a £95 million white-labeled multi-manager and multi-asset product, for a third party, which contains a hybrid blend of long-only and absolute return funds, managed against a conventional asset class benchmark of equities and bonds. The third sleeve is the hardest to pin down. Rather than running off-the-peg products for external clients, Timmerman’s team are providing advisory services to institutional investors about “how their portfolio can be improved – and whether their current alternatives book matches what they are trying to achieve,” he says. Recently, for instance, Ignis has worked with UK local authority pension funds on a review of their portfolios, which in turn can lead to follow-on work. This advisory work is completely tailored to individual client needs.

As well as being CIO of Ignis Advisors, Michiel Timmerman is head of equity, with James Orbell as head of macro and event, and Ingrid Neitsch, ex-FRM, as head of credit. Although Timmerman himself spent two years as COO of a European equity long/short hedge fund, he does not double up as COO at Ignis Advisors. Mark Long, formerly from FRM, is COO and leads a team of five who carry out operational due diligence, including site visits to asset managers and administrators, separately from the investment due diligence.

Timmerman says the team are constantly “ferreting around to find the best talent,” and thinks Ignis’s due diligence “combines the best of RBS/Aberdeen, FRM and Ignis approaches”, with these being some of the team’s old shops. Timmerman likes to use quantitative tools to gauge portfolio and manager sensitivities to varying scenarios, such as high and low-volatility markets. He then tries to ensure a balance of managers that will perform well under a range of scenarios, such as average, high or low volatility. Factor analysis breaks returns down into traditional betas, hedge fund factors and manager-specific returns. With all external managers they try to look for “hunger, focus, aligned remuneration, and demonstrable edge”. Ignis is not aiming to buy and hold managers forever: “The timing of investment decisions depends partly on the opportunity set for particular strategies, which each have their own performance drivers,” Timmerman says.

Just as Fellingham was anxious to attract new talent when he arrived, so too Timmerman has “strengthened the team with experienced hires who have allocated through many market cycles”. Broadening and deepening these analytical capabilities has also enabled Timmerman to spread Ignis’s wings beyond absolute return and hedge funds and into new, less liquid products. Having previously invested at Coutts in private equity, Timmerman is now putting capital to work at Ignis in the asset class, through a fund of funds structure together with David Donahue. This builds on Ignis’ current substantial allocation to private equity, illiquid credit and real estate funds. Timmerman also classifies illiquid credit under the private equity heading. In this area Ingrid Neitsch, who previously managed the FRM Credit Long Short fund of funds, is investing the Ignis Sterling Credit Fund, allocating to private credit funds and “exploiting hedge fund credit selection skills to reach further out onto the liquidity curve,” where Timmerman says the shrinking of bank balance sheets has created good opportunities – for example, direct lending to corporates at attractive rates. These funds have a closed end, private equity-style structure, drawing down capital commitments as and when opportunities are found. The Strategic Credit Fund already has committed capital from Phoenix Group and Timmerman and Neitsch are now looking to attract third-party investors.

Multi-manager track records
Timmerman rejects the suggestion that his business is another case of convergence between funds of funds and consultants. “The big difference between us and consultants is that we have a demonstrable track record and consultants don’t,” claims Timmerman. For instance, the fund of hedge funds, managed by James Orbell, displays an impressive 2009:2008 return ratio. It lost 8.15% in 2008 and made more than twice as much – 17.67% – in 2009. The product had much shallower drawdowns than the average fund of funds, recovered them much faster, and has also delivered less equity market correlation. Timmerman’s own previous track record from the Coutts (and now Aberdeen) Orbita range was also well ahead of the peer group: between August 2000 and May 2010, the Orbita Global Opportunities Strategy Limited annualised at 7.2%, virtually doubling investors’ money. His hedge fund team have years of experience of generating returns “through market cycles and long periods of time, having seen the ups and downs of cycles”. They also have a “qualitative feel about making money and risk controls,” and he thinks that this gut instinct is crucial, too. “Ignis’s advisory services can construct portfolios as well as recommending individual managers,” he adds.

Helped by bearish bond views
Three new launches are slated at Ignis. A non-UCITS macro rates hedge fund will essentially double exposures currently present in the UCITS ARGBF, with all else, including risk controls, broadly the same. While the existing product targets a 5% spread over cash rates – which was surpassed in 2011 and 2012 – the new one will aim to beat risk-free rates by 10%.

Whereas the flagship ARGBF trades mainly developed G10 government bond markets, Ignis also has experience of emerging market bonds and currencies. Like ARGBF, the soon-to-be launched Absolute Return Emerging Markets Debt and already available Absolute Return Credit funds both have the flexibility to be long or short. ARGBF has been, on average, short of interest rate duration risk since around September 2012 – having been generally long for the prior 16 months. The short view has been profitable this year, but the team finds it easy to tactically trade around the core view. For instance, short-duration risk was reduced ahead of the 18 September FOMC meeting. Although Ignis had expected Bernanke to announce an immediate start to tapering, the manager’s “aggressive risk controls” meant they chose to lighten up before he spoke, in view of the event risk. Ignis still think that a US economy in rude good health will lead to tapering and view the 18 September statement as merely a temporary delay to the process, and expect the Fed to begin raising rates in 2014. Ignis’s macro views come partly from chief economist and co-manager Stuart Thompson, who recently opined on house blog www.ignisratesviews.com that inflation could fall short of consensus expectations. Ignis use the blog to disseminate their thoughts after they have implemented trade ideas. Fellingham suggests that anybody seeking more contemporaneous market views needs to invest in order to get more timely access to the managers!

The emerging markets rates fund can go long or short of individual country risk as well as interest rate risk, while the credit fund takes long and short positions in individual corporate credit spreads. This flexibility has helped both products to broadly preserve capital in 2013, a year when many long-only bonds, rates, or emerging products have lost money so far from the sell-off in government bonds. The Absolute Return Emerging Market Debt strategy is down 0.18% year-to-date. And although the Ignis Absolute Return Credit Fund is only up 1.17% for the year to August, the product has so far been annualising at volatility below 1%, using only a small fraction of its 6% volatility target. This fund, run by Chris Bowie, has so far shown slightly negative correlations to government bonds, corporate credit indices and emerging market credit indices. It can take both longer-term, structural views on credits and shorter-term, tactical trades, with most of the trades constructed as pairs.

Both Timmerman and Fellingham have strong records of building businesses. Timmerman was a founder member of the team which grew Coutts’s fund of funds assets from a few hundred million dollars to over $5 billion, while Fellingham presided over fixed income assets advancing from £2 billion to £24 billion at Mercury/MLIM/Blackrock. This is where Fellingham and Timmerman’s paths crossed. Timmerman allocated UK fixed income mandates to Fellingham over this period. Ignis has a good track record of deploying its assets and platform infrastructure to incubate and develop talented fund managers and is becoming a force to be reckoned with in the absolute return and hedge fund worlds. Absolute return investors should keep an eye out for the four new funds flagged above – and watch this space for further new product launches next year.