Batten Down the Hatches - RankiaPro...Frederiek Van Holle Anouk Slock Quant Analyst RI Strategist Joeri Willems, CFA Quant Analyst RI Specialist QUANT SOLUTIONS 18 11 ‘12 ‘11 ‘05

GLOBAL BONDS

October 2019

DPAM L Bonds Universalis Unconstrained

Batten Down the Hatches

Peter De Coensel

2

WHAT IS THE UNIVERSALIS?

DRIVERS OF PORTFOLIO

CONSTRUCTION APPENDIX

PERFORMANCE AND

RISK ANALYSIS

Performance driven by conviction and

risk factor control

Express long-term, medium-term,

and short-term views

Investment philosophy

Investment objective

Investment process

An indispensable part of your fixed income

allocation

A unique global, flexible bond fund that dares to differ

Do not overcomplicate, no short cuts on

liquidity, and show conviction

WHAT IS THE UNIVERSALIS? An indispensable part of your fixed income allocation

A unique global, flexible bond fund that dares to differ

Performance driven by conviction and risk factor control

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4

KEY CHARACHTERISTICS

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Source: Bloomberg, Data until 16/10/2019

Combining capital preservation with high conviction

FIXED INCOME FUND MANAGERS

6

Peter De Coensel CIO Fixed Income, Member of the Management Board, Fund Manager ‘09

28

#

# Years of experience

Entry date

Teamleader

‘09

28

Peter De Coensel Fund manager

‘05

21

Bernard Lalière Fund manager

‘04

18

Steven Decoster Fund manager

‘11

13

Anahi Machado Tironi Fund manager

Marc Leemans, CFA Fund manager

Michaël Vander Elst Fund Manager

‘18

31

‘09

21

Sam Vereecke, CFA Fund Manager

GLOBAL GOVERNMENT & INFLATION EMERGING MARKETS

Ronald Van Steenweghen Fund manager

EURO GOVERNMENT

GOVERNMENT BONDS

Lowie Debou Fund manager

‘16

03

‘18

13

Jean-Charles Moulaert Fund Manager

‘19

13

Hugo Verdière, CFA Fund manager

‘04

27

‘07

14

GLOBAL UNCONSTRAINED

HIGH YIELD INVESTMENT GRADE

CORPORATE BONDS

UNCONSTRAINED ‘15

13

Arthur Homo Construction & Materials Industrials & Basic Resources

‘13

21

Michaël Oblin Oil & Gas, Utilities, Real Estate

‘11

08

Andrew Deback, CFA Chemicals, Healthcare & Financial Holdings

‘16

10

Barbara Mainieri Banks

‘14

12

Isabelle Peiffer Retail, Cons. Goods, Food & Beverage, Pers &Household goods

Jonathan Marin, CFA Insurance

05

‘19

Alexandre Thill, CFA Convertible bonds

04

‘19

BUY-SIDE CREDIT ANALYSIS

Frederiek Van Holle Quant Analyst

Joeri Willems, CFA Quant Analyst

QUANT SOLUTIONS

18 11

‘12 ‘11 ‘05

17

Ophélie Mortier RI Strategist

SRI COMPETENCE CENTER

Anouk Slock RI Specialist

‘17

03

Florent Griffon RI Specialist

‘18

13

Gerrit Dubois RI Specialist

‘18

03

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DRIVERS OF PORTFOLIO CONSTRUCTION Express long-term, medium-term, and short-term views

Do not overcomplicate, no short cuts on liquidity, and show conviction

EXPECTED RETURNS

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Expected bond returns turned the corner over the summer of 2018 Positive bond momentum was supported by dovish central banks and a subdued inflation outlook. Momentum is clearly losing steam

Source: Bloomberg Barclays Indices , BoAML, Data until 30/09/2019

As a consequence, yields have been decreasing across yield curves and bond sectors

HISTORY OF EXPECTED RETURNS

9

Source: Bloomberg, Merrill Lynch, Data until 30/09/2019

HISTORY OF EXPECTED RETURNS

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Source: Bloomberg, Merrill Lynch, Data until 30/09/2019

As a consequence, yields have been decreasing across yield curves and bond sectors

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MEDIUM-TERM VIEWS 1-3 YEAR HORIZON

SHORT-TERM VIEWS 6 MONTH TO 1 YEAR HORIZON

Study fiscal multipliers

MONETARY SIDE OF CENTRAL BANKS

PREPARE FISCAL ASPECT OF GOVERNMENTS

Money growth EU vs US Market expectations vs CB credibility

EXPLOIT CURVE DYNAMICS

LONG-TERM VIEWS 3+ YEAR HORIZON

GLOBALIZATION ON HOLD

Trade disputes Dollar support or strength

GLOBAL REAL RATES VERSUS INFLATION DYNAMICS

Cheap breakevens versus realized inflation

Real curve convergence takes over

FX EXPOSURE

Favor USD to EMFX

INCREASING RATES PROTECTION

Option strategies: short calls & collar Antifragile positioning: short BTP

INCREASING FLIGHT TO SAFETY AND STRENGTHENING CREDIT PROFILE

CHF quality credit JPY government

12

LONG-TERM VIEWS

Stalling globalization

Global real rates versus inflation dynamics

What drives the current Universalis’ secular positioning

on a 3+ year horizon

13

Globalization put on hold

(DE)GLOBALIZATION

Source: Thomson Reuters, Data until 31/12/2018

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(DE)GLOBALIZATION

Both imports and exports in the euro area have been stagnating since 2018 Over the years it evolved from a net importer to a net exporter


(DE)GLOBALIZATION

15

Globalization & de-regulation has been USD bearish, while stalling globalization & regulation is USD bullish. QE intensity brings short term variations. The reserve currency status of the USD is intact due to the lack of credible alternatives


16

DEGLOBALIZATION

Over 2020 the ECB will inflate monetary base more than the Fed leading to continued dollar strength or at worst a consolidating EURUSD exchange rate


GLOBAL REAL RATES

17

In the euro area, the divergence between what the market is pricing is getting more and more detached from what the data is saying


GLOBAL REAL RATES

18


US inequality keeps on rising. Core inflation exhibits stability since end of 90’s However, labour’s share of national income is finally rising since 2015 Expect market based inflation expectations to rise over next decade

GLOBAL REAL RATES

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In the US, the real rates curve seems to be an outlier compared to other regions Convergence with other real rate curves is the path forward

20

MEDIUM-TERM VIEWS

Steady accommodative monetary policy

Concerted fiscal action

Curve dynamics

What drives the current Universalis’ tactical positioning

on a 1-3 year horizon

21

MONEY SUPPLY


Money supply growth is increasing again on the back of more expansionary central banks. New asset purchase programs are impacted by diminishing economies of scale On balance, these purchase programs will be more supportive for corporate credit versus government bonds

22

MONETARY POLICY


Fed follows conventional path of interest rate cuts as widely expected by markets The ECB lets time do its magic and call on governments to act. The markets’ base case and our base case with respect to policy rates are aligned

23

FISCAL MULTIPLIERS

Source: A.J. Auerbach, Y.Gorodnichenko, Fiscal Multipliers in Recession and Expansion (2011)

The response of real GDP in OECD countries to an unanticipated 1% increase in government spending is much higher during recessions than expansions

24

FISCAL AND MONETARY POLICY

The more fiscal and monetary policy become interrelated, the less pressure rising debt levels have on the level of interest rates


25

CURVE DYNAMICS: PREPARE FOR STEEPENING


German spot and forward curves have flattened agressively. Inversion is difficult within NIRP Base case scenario: steepening of German yield curve US spot curve shows inversion up to 5 year point Base case scenario: steepening of US Treasury curve around 3y-5y pivot

26

SHORT-TERM VIEWS

FX exposure: seek balance between EUR and USD versus modest EMFX

Increasing rates protection

Increase anti-fragile content

What drives the current Universalis’ opportunistic positioning on a 6 month to 1 year horizon

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EUR & USD investment dominant

Exit BRL, reducing CAD

Status quo on MXN, ZAR and CZK

Short call Bund across different strikes

Collar strategy: short call -- long put in Bunds

No signal to establish protective credit overlay strategy Lowered Euro & USD corporate hybrid exposure, took profit on Italian bank credit Hold pocket of CHF credit and JPY government bonds Hold short Italian BTP position

Short 30y Bund futures Short 10y Bund futures

FX EXPOSURE


STRENGTHENING CREDIT PROFILE & INCREASE ANTI-FRAGILE CONTENT

September October November

September October November

28

MODEST FX EXPOSURE IN EM COUNTRIES

High Positive Conviction

Neutral Conviction

High Negative Conviction

29


Options are used to protect the portfolio against unexpected rate movements The portfolio will gain when the 10 year German rate would suddenly rise as we are short call options across different strike prices

30


Collar strategy: short call – long put on Bund futures, expiry November 22nd Fund reduces duration profile with 2.5% if underlying 2028 Bund rate rises above -0.37% before November 22nd If we fall deeper into negative territory i.e. below -0.75% the fund drops 0.45% duration risk

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A short position in Italian futures acts as an antifragile postion in the portfolio, i.e. a position that profits from market stress. Market is complacent about Italian government bond risk. Italy, essentially, remains a fragile credit.

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TODAY’S RISK BUDGET: LOW… AGAIN

3.00% Monthly VaR maximum

Increase interest rate duration

Conviction in EMU periphery

Neutralizing duration Lower USD allocation

Increasing rate and spread duration. High USD allocation

Total VaR: 1.76%

Source: DPAM, Data until 15/10/2019

Curve VaR: 0.49%

FX VaR: 0.98%

Credit VaR: 0.30%

Yield to Worst 1.58%

Modified Duration 5.44%

Average Rating A+

Assets under Management 872.83mio

Spread Duration 8.95%

Total volatility (ex-ante/annual) 5.53%

Liquidity score 0.35%

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MAIN FUND PARAMETERS

34

LIQUIDITY: STRONG

DPAM Bonds L % Liq 1

day

% Liq 3 days

% Liq 5

% Liq 10

% Liq 15 % Liq 20

days

% Liq 30 days

days days days

DPAM L - Bonds Universalis Unconstrained 87% 98% 100% 100% 100% 100% 100%

Active side: Time to liquidation

The liquidity profile of fixed income funds was previously measured by a bid-ask spread. A new in-house model has been developed during the period under review using artificial intelligence predictions. The model is based on gradient boosting using TRACE data for volumes and specific metrics associated to each fixed income instrument such as bid-ask spreads, amount issued, probability of default, duration, convexity, yield to maturity and ratings. The model estimates an average daily level of volume for fixed income instruments and aggregates the overall in order to have a liquidity measure at the level of the fund. The model is designed to measure the average liquidity of an instrument, it is however not capable of predicting instantaneous liquidity shortfalls in the fixed income market.

Passive side: Redemption simulation Based on historical redemption data and historical probabilities of redemptions, redemptions are stressed during a period of 20 days. The table below shows the percentage of AUM still left for each day the outflows are stressed.

Number of days % of AUM left in fund

0 100.00%

1 99.57%

2 99.33%

3 99.14%

4 98.97%

5 98.81%

6 98.67%

7 98.53%

8 98.39%

9 98.25%

10 98.11%

11 97.99%

12 97.86%

13 97.73%

14 97.61%

15 97.48%

16 97.36%

17 97.24%

18 97.13%

19 97.01%

20 96.89%

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DYNAMIC BOND SECTOR ALLOCATION

TILTING TOWARDS GOVERNMENT BONDS

36

PORTFOLIO CONSTRUCTION

GOVERNMENT VERSUS CORPORATE EXPOSURE


Currency Distribution Mod Duration Contribution /

Currency

37


CURRENCY DISTRIBUTION AND CONTRIBUTION TO DURATION


38


SECTOR CONTRIBUTION TO DURATION


39

MEDIUM-TERM VIEWS 1-3 YEAR HORIZON

SHORT-TERM VIEWS 6 MONTH TO 1 YEAR HORIZON

Fiscal multipliers

MONETARY SIDE OF CENTRAL BANKS

FISCAL ASPECT OF GOVERNMENTS

M1 money growth Market expectations

CURVE DYNAMICS

LONG-TERM VIEWS 3+ YEAR HORIZON

DEGLOBALIZATION

Trade disputes Dollar strength

GLOBAL REAL RATES VERSUS INFLATION DYNAMICS

Breakevens versus fundamentals Real curve convergence

FX EXPOSURE

Favor USD to EMFX


Use of option strategies Antifragile positioning

INCREASING FLIGHT TO SAFETY AND STRENGTHENING CREDIT PROFILE

CHF quality credit JPY government

40

PERFORMANCE AND RISK ANALYSIS

41

PERFORMANCE YTD PERFORMANCE: +13.59%


42

PERFORMANCE 3Y PERFORMANCE: +4.13% Annualized


43

PERFORMANCE

2019 YTD 3 Years 5 Years

Total Return Total Return Annualized Total Return Annualized

DPAM L Bonds Universalis

Unconstrained +13.59% +12.92% +4.13% +24.68% +4.51%

5 Years 3 Years

44

RISK ANALYSIS 3Y ANNUALIZED RETURNS VERSUS STANDARD DEVIATION

PEERS ANALYSIS BASED ON MORNINGSTAR GLOBAL BOND UNIVERSE

start date 2016-10-11

end date 2019-10-11

format should be YY-M M -DD (as text)

rank - return 8/225

rank - risk/return 1/225

45



rank - return 53/198



end date 2019-10-11


46



rank - return 20/119



end date 2019-10-11


47

APPENDIX Investment philosophy

Investment objective

Investment process

GLOBAL UNCONSTRAINED PORTFOLIO ROBUSTNESS

Benchmark agnostic & global

Our VaR model provides us with continuous risk management and control capabilities

Traditional portfolios' risk exposures are predominantly determined by the benchmark. A benchmark agnostic strategy allows for more deliberate risk-taking across a broad set of covered and known bond sectors.

Barclays Point/Bloomberg PORT+ tracks risk factors that drive return volatility (duration, FX risk, spread risk, curve risk and company specific risk). We actively manage the riskfactor set enabling the portfolio to weather storms.

Flexible Expected shortfall and stress tests

Diversify across curves, currencies and credit spread risks taking advantage of a global range of opportunities. Dynamic allocation between ‘low risk’ and ‘value’ sectors/bonds.

Standard and historic sensitivity tests provide information that can lead to direct and/or indirect hedging activity.

Conviction framework Security selection dominates

Convictions are weighted in relation to the value on offer, liquidity and investment horizon (short term, medium term, long term). Seasoned credit and country analysts identify quality bonds.

Through meticulous country & credit analysis, we obtain a diversified fund that captures value and deep value at times. However, we avoid distressed bonds.

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INVESTMENT PHILOSOPHY A ROBUST PORTFOLIO ACROSS A GLOBAL SET OF FIXED INCOME SECTORS

Region

Curve

Hedging

Duration

RATES

Sector

Issuer

Hedging

Spreads

CREDIT

EUR

OECD

Hedging

EM

FX

EURIBOR 3M + 200bp

49

INVESTMENT OBJECTIVE RETURNS DRIVEN BY CONTROLLED RISK FACTOR EXPOSURE

COVERED BONDS

INVESTMENT GRADE

HIGH YIELD CONVERTIBLE BONDS

CORPORATE BONDS

DEVELOPED MARKETS

EMU INFLATION LINKED BONDS

EMERGING MARKETS

SOVEREIGN BONDS

€

INVESTMENT UNIVERSE

50

INVESTMENT PROCESS GLOBAL INVESTMENT UNIVERSE

GLOBAL INVESTMENT UNIVERSE

Constructing the strategic investment view Defining risk appetite across risk factors in function of:

€ €

MACRO-ECONOMIC ANALYSIS

GEO-POLITICAL ANALYSIS

MONETARY POLICY

ANALYSIS

INFLATION LINKED

ANALYSIS

Interest rate volatility Credit index volatility Equity index volatility FX volatility Commodity volatility

Reaction function central banks Political calendar

51

INVESTMENT PROCESS TOP-DOWN

52

INVESTMENT PROCESS TOP-DOWN

CONTINUOUS TEAM EFFORT

DPAM Fixed Income Committee, monthly

Rates Meeting Recommendations:

Conviction Sheet Once a week

Credit Meeting

Daily interaction, monthly sectorial outlook

Macro Meeting

Once a month

FORMULATE GLOBAL MACRO INVESTMENT STANCE

Fundamental analysis

Financial risk

Internal Financial Model

Free cash flows Credit metrics Off-Balance sheet figures Debt Maturity Profile Liquidity and financial flexibility Volatility of earnings Projections

Country/Macro risk Industry risk

Competitive position: Market position Diversification (business & geographical) Operating efficiency Management, risk appetite, track record Ownership/governance

Profitability / Peers comparison Regulation

Business risk

Curve value versus inter and intra sector valuation

Relative value

Capital structure

Subordination (Structural / Contractual) Covenants

Documentation High Yield bonds Corporate Subordinated financial debt (Tier 1 / LT2 )

Bond’s structural risk

ESG analysis

Qualitative analysis of ESG criteria

53

INVESTMENT PROCESS BOTTOM-UP

Based on 4 pillars

Controversies & Exclusions

Exclusion of armament, tobacco, pornography and gambling sectors

Exclusion of the most controversial companies (quantitative and qualitative criteria)

Exclusion non-compliant companies with the 10 principles of the UN global Compact

Normative ESG screening

ESG performance is included in the fundamental analysis.

Active voting policy and engagement

Qualitative ESG screening

Best in class approach: exclusion of the WORST ESG scoring companies

Quantitative screening

54

INVESTMENT PROCESS OUR ESG-APPROACH: INTEGRATION

Government bonds (DM & EM)

Sizing Conviction Pace Horizon Rating support

0% - 1% Low Initiate < 6 months B to AAA

1% - 3% Medium Accumulate 6 months to 1 year B to AAA

3% - 5% High/tactical view Consolidate & rotate 1 year to 2 years Investment Grade

5% - 15% High/secular view Consolidate & rotate 2 years to 3 years A to AAA

Corporate bonds (DM & EM)

Sizing Conviction Pace Horizon Rating support

0% - 1% Low Initiate < 1 year B to AAA

1% - 3% Medium Accumulate 1 year to 2 years B to AAA

3% - 5% High/tactical view Consolidate & rotate 2 years to 3 years Investment Grade

55

INVESTMENT PROCESS CONVICTIONS

2ND LEVEL

PORTFOLIO & ORDER MANAGEMENT SYSTEMS OPERATIONS

3RD LEVEL

RISK, LEGAL & COMPLIANCE

4TH LEVEL

AUDIT

1ST LEVEL

PORTFOLIO MANAGEMENT

Ad-hoc control

Independent control

Permanent control

Permanent control

56

INVESTMENT PROCESS RISK CONTROL

57

Minimum issue size: € 500 million/$ 500 million depending on the issue currency. Maximum investment: the fund can buy maximum 5% of the issue size. Rating: minimum 90% of the portfolio is invested in fixed income securities with an

investment grade rating. Maximum 10% of the portfolio can be invested in high yield securities and non-rated debt instruments (measured on a net exposure basis).

The exposure to subordinated bonds and perpetual bonds cannot exceed 20% of the portfolio.

Maximum 10% can be invested in convertible bonds. Maximum 25% can be invested in covered bonds. The fund is not allowed to invest in ABS, MBS, Credit Linked Notes (CLN) nor in fiduciary

notes. Cash & term deposits: maximum 10%. Use of derivatives: allowed. Currency hedging and management can be applied at the fund manager’s discretion.

INVESTMENT PROCESS INVESTMENT CONSTRAINTS

58

DPAM FUND RANGE

€ IG Corporate Bonds High Yield Corporate bonds

Fixed Maturity

Short Term

Corporate 20% BBB

Iboxx TEV 2%

max Short Term

European Corporate

Opportunities € Corp HY

Global Bonds Unconstrained

Alternatives

€ Government Bonds Emerging Market

Government Bonds Global Government

Bonds Active GDP weighted SRI

Horizon Horizon SRI Design

Passive

No rate risk Active

1Y-5Y 1Y-10Y IG

JPM EMU

JPM EMU index

OECD Sustainable

Global Treasuries

Global Inflation

SRI

Emerging Market Sustainable

Global Unconstrained

Higher Yield

Convertible Bonds Europe

Unconstrained Benchmarked

Climate Trends Sustainable

SRI

HEAD OFFICE Belgium

LOCAL OFFICES

59

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DE LU

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FR

Place de l’Université 8 , 1205 Geneva +41 22 929 72 23

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CH IT

Paseo de la Castellana 141, Planta 19, 28046 Madrid +34 91 5720 366

De Entree 238 A, 1101 EE Amsterdam +31 2 05 73 54 05

ES NL

+32 2 287 91 11

/degroofpetercam

degroofpetercam.com dpamfunds.com

Rue Guimard 18, 1040 Brussels Belgium

Dpam @degroofpetercam.com

publications.dpamfunds.com

Present documents do not constitute investment advice nor do they form part of an offer or solicitation for the purchase of shares, bonds or mutual funds, or an invitation to buy or sell the products or instruments referred to herein. Applications to invest in any fund referred to in these documents can only validly be made on the basis of the Key Investor Information Document (KIID), the prospectus and the latest available annual and semi-annual reports. These documents can be obtained free of charge at Degroof Petercam Asset Management sa, the financial service provider or on the website www.dpamfunds.com. All opinions and financial estimates herein reflect a situation at the date of issuance of the documents and are subject to change without notice. Indeed, past performances are not necessarily a guide to future performances and may not be repeated. Degroof Petercam Asset Management sa (“DPAM”) whose registered seat is established Rue Guimard, 18, 1040 Brussels and who is the author of the present document, has made its best efforts in the preparation of this document and is acting in the best interests of its clients, without carrying any obligation to achieve any result or performance whatsoever. The information is based on sources which DPAM believes are reliable. However, DPAM does not guarantee that the information is accurate and complete. Present documents may not be duplicated, in whole or in part, or distributed to other persons without prior written consent of DPAM. These documents may not be distributed to private investors and their use is exclusively restricted to institutional investors.

The information contained in this mail and attachments (hereafter the ‘documents’) is provided for pure information purposes only.

DISCLAIMER

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Documents

Batten Down the Hatches - RankiaPro...Frederiek Van Holle Anouk Slock Quant Analyst RI Strategist Joeri Willems, CFA Quant Analyst RI Specialist QUANT SOLUTIONS 18 11 ‘12 ‘11 ‘05