Interviewing Christophe Auvity, BNP PAM, PARVEST European
Corporate Bond Fund manager
Sep 2003
What is your view on Euro bond market?
In terms of macro expectations, there are signs of US recovery to be building with
good signals on consumer spending and increasing corporate profits. The path for
growth in Europe will be far slower. Inflation is very much under control in Euroland
and we expect one last move down on ECB rates in the next coming months. Real
yields above 2.5% seems to us attractive compared to GDP growth levels. Flows
which were heavily favouring back equity versus bonds have drove market from may
to august pushing yields up. We expect market trading back to fundamentals with
equity market at fair value now and trading in a range of 3.80 to 4.30%.
What are your main bets consequently?
We increased slightly duration starting around 4.10% by buying 10 years maturity
late August. Contrary to what forward curves reveal, we still expect an ECB rate cut
of 25 basis point in the next running six months, once the EUR will stabilised versus
USD, considering that monetary policy is one of the remaining instrument to help
boosting the economy further. We consequently favour medium term maturity 2-5
year area of the curve.
What about corporate sector’s health in Europe?
European companies are improving their balance sheets through de-leveraging
efforts Consequently, on the rating agencies side, downgrading trend is expected to
decline but is still remaining historically high with less Fallen Angels. On a market
stand point, a positive point is that there is less pressure on new issuance in H2
2003. If we were cautiously overweighting in the first half of 2003 A and BBB issuers,
the most subject to benefit from a corporate rally, we now rather favour AA names,
an approach slightly more cautious to benefit from opportunities on more stable
categories.
Talking about sector allocation, we would favour financial sector less prone to
deterioration of credit quality and offering a pick-up in risk/return on subordinated
paper. According to our macro scenario where we expect a slow recovery path, we
would as well recommend non cyclical sectors such as consumer non cyclical, real
estate & capital goods. On the other side, we would be negative on some subsectors such as auto and insurance for fundamental reasons and chemicals for
technical reasons.
Concerning issuer selection, we are conducting a very rigorous issuer selection due
to event risk, avoiding those facing high level of short-term debt or deregulation risk
(utilities).
On the other hand, we recommend some issuers not presenting weaknesses found
in sectors on which we are negative or neutral ( Auto with PSA, Telecom Italia and
Deutsche Telecom in Telecom...).
Focus on corporate
What is your investment approach in this field?
We manage Euro corporate bond funds since 1997, and we firstly conduct a top
down approach, the positioning in the economic cycle giving us a view of the relative
strength of corporate sector. Institutional investors generally go into credit exposure if
they offer prospect of relative out-performance versus government bonds. Our
indicator in this field is the relative swap premium which indicates the relative value of
sovereign versus credit bonds.
We are then very much risk control driven and allocate into credit depending on
rating categories. They effectively behave per category very similarly, with more
volatility on lower rating and greater stability on higher ones.
Finally, our approach is concentrated on selecting sectors, issuers by using our credit
research recommendations to avoid the worst sectors/issuers and properly diversify
our portfolios.
To conduct this, we use in house resources structured into four main teams: portfolio
managers, and among those 5 are specialised on credit, and three research teams:
our macro economic research team which helps in building a macro scenario, our
credit research team which dedicated to Euro bond portfolio management and
intensively research on a limited number of issuers; finally we use a dedicated Euro
fixed income quant team which helps in providing models to properly analyse credit
risks ex ante, help in modelling credit curves to select issues and help in optimising
allocation.
What is your competitive positioning on PARVEST European Corporate Bond
fund?
PARVEST European Corporate Bond fund, as end of June 03 is pretty well
positioned in the universe of corporate bond funds, with according to Micropal, a
ranking of 13/86 over six months and 11/83 over one year. Its performance is
relatively speaking very much linked to its Euro corporate benchmark.