GENEVA. - Tuesday, May 20th 2014
Growth in developed economies continues to firm up. The United States briefly lost some momentum as a result of tough winter weather but the general trend remains good and the latest data shows that the economy has recovered from this soft patch. The euro area is still showing signs of improvement driven by the strong economic recovery in peripheral countries. Meanwhile central banks remain extremely cautious: the ECB and the BoJ have both intimated that they are prepared to implement extra and extraordinary stimulus measures. The Fed is to carry on gradually trimming its asset-buying program (so-called “tapering”) and any rise in rates is still a long way off.
This is a positive environment for risky assets and high-yield spreads in particular, which continue to offer attractive valuations via high-yield CDS indices. They remain undervalued, as highlighted by the 6.4% implied default rate while expectations for default rates this year and next stand at only 2.0%, well below the historical average of 4.0%. Considering that high-yield CDS indices bear no interest risk and offer high liquidity in all market conditions, the value proposition for CDS spreads is compelling.
Furthermore, high-yield CDS indices are now modelled on the clearing practices in the interest-rate futures markets, enabling strategies that use CDS indices – such as Union Bancaire Privée’s Global High Yield strategy – to benefit from a zero counterparty risk. Also, by aligning itself with the US regulators’ schedule, which is ahead of Europe’s, Union Bancaire Privée’s fixed-income team offers its European investors a significant advantage, as they can now benefit from daily liquidity with no counterparty risk when using CDSs.
In three years, Union Bancaire Privée’s Global High Yield strategy has amassed USD 1.48 billion in assets and has outperformed all of its peers, thanks to a unique management approach that uses, amongst other things, CDSs and an exclusive top-down investment policy focusing on analysing macroeconomic conditions and identifying the themes driving the financial markets – unlike most high-yield bond fund managers, who adopt an exclusively bottom-up approach which favours bond selection.
With this approach they are able to adjust the strategy’s exposure according to their expectations, across three dimensions: the exposure to the high-yield market; the geographical exposure to US and European high-yield markets; and the interest-rate exposure, which has been very limited since launch and is practically zero today. Furthermore, the use of CDSs enables the team to adopt a unique positioning, as the strategy is one of the only ones to use these instruments, and to enjoy almost perfect liquidity, given that traditional high-yield bond funds’ liquidity is usually hampered by transaction costs in excess of 1.5%. As well as this, CDSs offer an additional advantage over traditional bond investments in terms of returns. This can be put down to two factors: firstly, whereas the bond universe is finite (increased demand causes prices to rise and returns to fall), the CDS market is not subject to capacity constraints; secondly, CDSs – in contrast to bonds – bear no early repayment call, which preserves their return potential.
The strategy has outperformed its peers in spite of the fact that one of its key characteristics – namely an almost zero exposure to interest rates – actually worked against it between 2011 and 2012 because of the bearish rate environment. The strategy should therefore continue to perform strongly in the current positive environment.
The information and opinions contained herein were prepared by Union Bancaire Privée, UBP SA (hereinafter, “UBP”). The information herein was obtained from various sources and is believed by UBP to be reliable but UBP makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this document constitute the current judgment of the author as of the date of this document and are subject to change without notice. UBP has no obligation to update, modify or amend this document. This document is provided for information purposes only. It is not to be construed as an offer to buy or sell or solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The financial instruments discussed in this document may not be suitable for all investors and these materials should not be regarded by recipients as a substitute for the exercise of their own judgment. Investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situation and their investment objectives. Investors should be aware that foreign exchange rates may have a negative effect on the price or value of, or the income derived from, an investment denominated in a foreign currency. Furthermore, past performance is not necessarily indicative of future results. UBP may make a market in, or may, as principal or agent, buy or sell securities of the companies mentioned in this document or derivatives thereon. UBP may have a financial interest in the companies mentioned in this document, including a long or short position in their securities, and or options, futures or other derivative instruments based thereon.
About Union Bancaire Privée (UBP) UBP is one of Switzerland’s leading private banks, and is among the best-capitalised, with a Tier I ratio of 29%. The Bank is specialised in the field of wealth management for both private and institutional clients. It is based in Geneva and employs about 1,350 people in some twenty locations worldwide; it held CHF 87.7 billion (USD 98.6 billion) in assets under management as at 31 December 2013. www.ubp.com
Contacts
Union Bancaire Privée
Jerome Koechlin, Tel: +41 58 819 26 40
Head of Corporate Communications
e-mail: jko@ubp.ch
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