Portfolio weathers US mortgage crisis

PUBLISHED : Tuesday, 22 April, 2008, 12:00am
UPDATED : Tuesday, 22 April, 2008, 12:00am

With no exposure to US subprime mortgages, BNP Paribas' Parvest Euro Medium Term Bond Fund weathered the subprime crisis last year. The fund based its analysis on economic quantitative models which identified a rise in euro yield in the first half of 2007.

'It showed us at the beginning of the summer that a crisis had emerged. Thanks to our overexposure in duration, we could take advantage of the flight to quality towards government bonds,' said Vincent Trouillard-Perrot, chief executive for Asia (ex-Japan), BNP Paribas Investment Partners.

The fund had placed a lower allocation in corporate credit because its management team thought the low credit spread did not offset the risk.

'At the end of the year, we began to build a position in those bonds which gave attractive spreads. We were very selective and bought mainly bonds issued by euro continental banks that had a well-balanced business. We also implemented some yield-curve strategies to take advantage of the opportunities in the bond market at this point, which added value to the portfolio.'

A team of 11 portfolio managers and 16 credit and quantitative analysts manage the fund. According to Mr Trouillard-Perrot, four principles are applied to the fund's management style. The first is that fundamental analysis is key to managing a euro aggregate portfolio over the medium to long-term.

Secondly, the management team believes that identifying market inefficiencies is essential to exploiting volatility in the fixed-income markets through additional, short-term tactical bets.

Thirdly, risk management is taken as an integral part of the management process and a precondition of limiting drawdown. Lastly, fund-flow analysis is considered key to assessing the relative value of bond markets compared to other markets.

The fund utilises both top-down and bottom-up investment approaches. The top-down approach entails fundamental analysis of macroeconomic trends on which the management team constructs three-month interest rate forecasts, said Mr Trouillard-Perrot. The bottom-up approach entails both a technical and a fundamental analysis of issuers completed by short-term trading strategies. 'Added value is derived from several uncorrelated strategies, predominantly duration, yield-curve positioning, credit allocation and issuer selection,' said Mr Trouillard-Perrot.

The portfolio is 42 per cent government-issued bonds, 37 per cent corporate issues and 21 per cent derivatives. 'The notional debt securities are issued by the German Federal Government, so we can add this 21 per cent to the 42 per cent,' said Mr Trouillard-Perrot. 'Therefore, the overall exposure to sovereign bonds is 63per cent.'

As of the end of last December there was Euro614.22 million (HK$7,53 billion) in the fund, predominantly from European investors. In total 20.5per cent of the assets were from France, 78.34 per cent from Europe (ex-France), 1.08per cent from Asia and 0.08 per cent from other regions.

Looking ahead at 2008, the investment 'universe' looks 'highly volatile', according to Mr Trouillard-Perrot, so the fund will seek to maintain principal value while waiting for risk once again to be priced fairly.

Investment allocation

France 42.35 per cent.

The Netherlands 12.23 per cent.

Italy 9.61 per cent.

Germany 9.37 per cent.

Greece 4.18 per cent.

Belgium 3.88 per cent.

Spain 3.72 per cent.

Finland 3.59 per cent.

Sweden 2.89 per cent.

Luxembourg 2.05 per cent.

Austria 1.67 per cent.

Portugal 1.38 per cent.

Britain 1.66 per cent.

Ireland0.51 per cent.

Switzerland0.42 per cent.

Norway0.41 per cent.

Denmark0.08 per cent.