Dynamic asset allocation and an ability to invest across capital structures mean that Patrimoine’s diversification processes stand out from others.
‘It’s vital for us to have the right tools to take advantage of opportunities, and at the same time to manage the overall risk profile of the fund,’ said David Older, who heads the equity team. ‘Rose Ouahba, who heads the fixed income team, and I spend a lot of time thinking about how the different components of the fund fit together from a risk perspective,’ he added.
Equity exposure can range from zero to 50%, while in the bond portfolio the modified duration approach can be between -4 and +10 years. At the same time, the ability to use a variety of asset classes including currencies, and a range of credit including investment grade, high yield and distressed debt gives a wide spectrum of possibilities.
Close contact between the equity and fixed income sides is essential, Older noted, adding that the size of the investment team is kept deliberately compact so that individuals with different expertise are able to speak on a constant basis. ‘This integrated structure underpins our top down and bottom up approaches,’ he said.
A recent example of how the team’s cross-capital structure approach is employed in deciding where to allocate risk was the use of European equity index futures to hedge credit exposure during the Covid crisis. ‘We were seeing huge dislocations in the credit market, and naturally wanted to hedge our own exposure. We use credit derivatives, but these are much more complex to implement than equity products,’ Ouahba said. As a result, the team decided to short equity indices because they have a strong correlation to credit in down markets, are highly liquid and easy to implement, she added.
‘Rose Ouahba, who heads the fixed income team, and I spend a lot of time thinking about how the different components of the fund fit together from a risk perspective’
Another example of how the team uses the fund’s range to exploit opportunities was the way in which credit exposure was raised coming out of the market collapse. ‘The dislocations in credit markets allowed us to find a number of great ideas which we were able to implement via four main themes,’ Ouahba said.
The first, investment grade credit, offered an attractive risk/reward profile as it stood to benefit from central bank intervention. The second, short dated bonds, had been in negative territory before the crisis and now offered a good entry point. Thirdly, tier one banking debt was positioned to gain from fiscal and monetary support.
The fourth theme, a play on companies that had suffered the most during the Covid crisis, was implemented on both the credit and the equity sides of the portfolio, but in different ways that illustrate the team’s bottom up stock picking abilities, as well as the benefits of constant interaction between the different elements.
‘Coming out of the crisis we bought airlines such as EasyJet and Ryanair, and aircraft manufacturers such as Boeing on the credit side,’ Ouahba said. ‘But in the equity book we did the opposite, selling our Ryanair holdings,’ she added.
‘The reason was that as an equity investor we look for growth, and our investment thesis for these companies had completely changed. But as a credit investor, the important factor is default risk, and the spreads on debt for these companies had blown out to a point at which they were very attractive,’ she said.
It was a similar story in the banking sector: using both equity and credit analysis allowed the team to find opportunities on the credit side and to decide the best part of the capital structure to enter.
‘The daily interaction between the different types of expertise we have in the team means we have a number of ways to formulate and implement themes in the portfolio,’ Older said. ‘In the end it comes down to where we think the risk/reward profile is best for us,’ he added.
Currency is another important element of the active investment approach, because the majority of the fund’s investors are euro-based. Here again, active hedging is employed where necessary. During the Covid crisis, the fund was almost fully invested in euros.
Carmignac Patrimoine is a common fund in contractual form (FCP) conforming to the UCITS Directive under French law. Risk scale: 4 (for the share class A EUR Acc). Risk Scale from the KIID (Key Investor Information Document) from 1 (lowest risk) to 7 (highest risk). Risk 1 does not mean a risk-free investment. This indicator may change over time. Recommended minimum investment horizon: 3 years. Main risks of Carmignac Patrimoine – EQUITY: The Fund may be affected by stock price variations, the scale of which is dependent on external factors, stock trading volumes or market capitalization. INTEREST RATE: Interest rate risk results in a decline in the net asset value in the event of changes in interest rates. CREDIT: Credit risk is the risk that the issuer may default. CURRENCY: Currency risk is linked to exposure to a currency other than the Fund’s valuation currency, either through direct investment or the use of forward financial instruments. The Funds may have specific investment limits, as mentioned in their respective prospectuses. The Fund presents a risk of loss of capital.
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