Newsletter | February 2021



Investment perspective

Equity markets got off to a good start in 2021 but ended January on a much weaker note. This weakness resulted mainly from concerns over the rollout of vaccines and from hedge funds slashing their exposures in a wave of volatility. The MSCI World Index in local currencies dropped by 0.8%, with Asian markets outperforming under the leadership of mega-caps such as Tencent, Alibaba or TSMC. Government bond markets also ended in negative territory; the yields of 10-year Treasuries climbed from 0.92% to 1.07% as markets priced in higher US federal spending and inflation expectations. This was triggered by the Democrats’ win of both remaining Senate seats in the January 5th Georgia run-off. With 50 senators on both sides of the aisle, the deciding vote of Vice-President Kamala Harris gives the smallest of majorities to the Democrats, boosting their chances of passing larger fiscal stimulus.

The 4Q 2020 earnings season is in full swing and 65% of the S&P 500's market cap have reported their results, at the time of writing. Earnings have surpassed estimates by 18.5% in aggregate, with 81% of companies beating analysts’ projections. Revenues have also beaten estimates by an average of 3.2%, with 74% of companies announcing positive surprises. These results did not represent such a strong support for equity markets, however. Many companies beating both on revenues and earnings underperformed the market, surprisingly. This muted reaction was likely due to cautious outlooks amid an economic environment which still remains uncertain.

The late-month underperformance of European equities can be explained, in part, by the negative developments relative to Covid-19. A disappointing start to the vaccination rollout, tighter restrictions and vaccine supply issues all contributed to dampen optimism over the reopening of economies.

Investment strategy

Our core scenario targets a strong economic rebound from the second quarter onwards and we have positioned the portfolios accordingly. Our equity allocation is overweight, and our fixed income exposure is focused on the dynamic segments of the market. We like emerging market debt, high yield credit and convertible bonds, whilst investment grade bonds are heavily underweight. Hedge funds and gold are the main portfolio diversifiers, and the level of cash is low. For non-USD portfolios, the dollar exposure is underweight.

Within the equity allocation, we have a broad diversification across regions, investment styles and market capitalisations. Equity markets are increasingly skittish and last year proved that even well-entrenched trends can reverse on a dime. That is why we remain allocated to both Growth and Value styles, with Value benefiting from depressed valuations, both on a relative and an absolute basis. From a regional perspec-tive, we have reinforced our China exposure and continue to favour emerging and Japanese markets. Finally, we are still exposed to Frontier markets which offer significant catch-up potential in view of low valuations and solid fundamentals.


Portfolio Activity/ News

January ended up being slightly negative for the portfolios in spite of a good start to the year. The number of contributors and detractors was split down the middle. The main equity contributions were provided by Chinese equities, US Small Caps, the multi-thematic fund and emerging markets; value funds were the main equity detractors. In the fixed income allocation, high yield and emerging market debt generated gains whereas investment grade funds detracted from the performance.

After a long hiatus, we have reinitiated a position in UK equities. We had neutralized our exposure to UK assets in view of elevated political uncertainty following the Brexit vote. This has proven to be a wise decision as UK equities have underperformed significantly over the last years. The UK is now, however, the most underweight region globally by asset allocators; the discount of UK equity market valuations relative to the rest of the world is also close to record levels. These factors are just some of the reasons that could trigger a catch-up of the UK equities in the year ahead. We have invested into a fund that we have known for a long time; its strategy is based on a value approach and on active management.

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Investment Perspectives 2021

Executive Summary

2020 was one of the most dramatic years for financial markets

The past year has been a rollercoaster ride for investors as the fastest equity market correction in history was followed by a swift and relentless rally. Equity markets have proven to be very resilient and very forwardlooking as they quickly priced in a strong rebound of earnings for 2021. This has been reflected by a significant re-rating of valuations which leave little room for any disappointments related to the publication of profits in the year ahead.

The Federal Reserve intervened decisively to address the severe dislocations observed in the bond markets, a key element to re-establish confidence. In addition to purchasing Treasuries and investment-grade corporate bonds, the Fed also committed to buy high-yield bonds for the first time ever. Once markets had stabilised, another strong trend was for the US dollar to depreciate against most currencies. The market broadly expects this behaviour to be extended into 2021.

Policy makers did their job in 2020

Central bankers and governments reacted promptly and decisively to support the economy and to limit the damage caused by the pandemic on businesses and households. Record-breaking aid packages and unprecedented support for financial markets were announced. The Federal Reserve slashed its benchmark interest rate to zero and committed to an unlimited expansion of its bond purchasing programs. The ECB also ramped up its asset purchase program and has recently announced an additional increase of €500 billion to a total of €1.85 trillion until March 2022.

The overall size of fiscal action globally has also been unprecedented, at about $12 trillion, close to 12% of global GDP, according to the International Monetary Fund. With economic activity being restricted by governments, their main objective was to prevent massive unemployment and to help businesses to survive the pandemic-induced shutdowns.

A successful rollout of COVID-19 vaccines is key for a strong economic rebound in 2021

The outlook for 2021 is for a strong rebound of GDP growth, + 5.2% according to the IMF, following a year when global GDP is estimated to have dropped by around 5%, the worst peacetime recession. Unprecedented fiscal actions and the rollout of vaccines are expected to significantly boost economic activity, even if some sectors are unlikely to be able to return to pre-COVID-19 levels of activity. Governments will also need to provide the framework for a successful and strong immunization programme by regaining public trust, which has been dented by the management of the crisis.

Current market conditions are supportive for risky assets despite rich valuations

We believe that the positive trends currently prevailing in financial markets should extend into 2021. Despite high valuations, we expect equities to benefit from a strong rebound of earnings in the coming quarters and the portfolios are positioned accordingly. High yield credit and emerging market debt are our favourite bond segments whereas our dollar exposure remains underweight. We are wary of a broad market consensus on the various asset classes as history has shown that the markets’ base case scenario is often derailed by unforeseen events.


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Newsletter | December 2020



Investment perspective

November was a record-breaking month for global stockmarkets. The MSCI World Index in local currencies surged by 11.8%, its best month since it was created in 1990. European markets outperformed, with the Euro Stoxx 50 Index rising by 18.1%, while US markets hit record highs. The positive vaccine announcements by several pharmaceutical companies were the key drivers for the strength of the equity markets. The appetite for risky assets was also reflected by much tighter credit and emerging market debt spreads, higher commodity prices and a depreciation of the US dollar. The price of gold weakened by 5.4% as demand for defensive assets subsided, even if sovereign debt yields ended the month with relatively limited changes.

The series of Covid-19 vaccine breakthroughs and Joe Biden’s victory in the US presidential election removed two quite significant tail risks from the market. Anticipations of a rapid economic rebound in 2021 were a major boost for the stocks of companies having been the worst affected by tight restrictions to limit the spreading of the virus. This was reflected by the rotation into the more cyclical sectors and by an outperformance of small caps. Markets also responded favourably to the outcome of the US elections as a still to-be-confirmed divided Congress should prevent radical reforms. The election of Joe Biden was also perceived as positive for international relationships and for global trade following a period of unpredictability and elevated tensions during Donald Trump’s presidency.

Optimism over a strong economic recovery was best reflected by the rally of oil in anticipation of higher demand for fuel products. WTI oil prices rose by over 26% during the past month to reach a level of $45 per barrel compared to $50 before the correction that took place in March and April.

The ongoing underperformance of the Value style compared to Growth has been well covered. As shown above, the MSCI Europe Value index has lagged the MSCI Europe Growth index in most of this year’s months. In November however, European value stocks made a spectacular comeback as they out-performed European growth ones by close to 11%, in large part the result of positive Covid-19 vaccine announcements. Banks, energy and automobiles were some of the best performing sectors.

Investment strategy

Our concerns over a potentially volatile period have proved to be unfounded as equity markets rallied in a spectacular fashion during November. The portfolios benefited from their broad diversification again as the largely out of favour value positions contributed the most during the past month. 2020 will be remembered for many reasons in the capital markets, but the speed at which market factors have changed during certain periods has been breath-taking. Our equity exposure is back to being overweight as a result of a new investment and of market performance. While we continue to be wary of the current valuations of equity markets, other driving forces are overwhelming and likely to push prices even higher.

Within fixed income, we consider emerging market debt to be one of the most the attractive asset classes and we have reinforced our exposure into EM corporate bonds. Emerging market assets should benefit from inflows, the depreciation of the dollar as well as from the cyclical recovery in 2021.


Portfolio Activity/ News

November was a strong month for the portfolios, with all the underlying positions, except gold, producing positive monthly returns. The highest contributions were provided by funds managed according to a value approach. One European fund gained 27% as it benefited mainly from its exposure to banks and oil. All European funds contributed well as did the US Value fund, the Japanese funds, and Small Caps overall. Within fixed-income, EM corporate debt, high yield and convertible bonds were the outperformers, while equity long/short was the best alternative strategy. The detractors proved to be gold and the US dollar for non-USD portfolios.

Towards the end of the month, we invested into a new fund focused on real assets. The fund’s types of assets include infrastructure, specialist property, renewables and other alternatives such as music royalties. These kind of assets benefit from well-defined income streams and long-term contracts. This investment solution can be characterized by its resilience, low volatility and low market beta.

The latest addition to our list of funds is a long/short credit fund primarily investing into US high yield corporate bonds. The manager has demonstrated his ability to protect the portfolio during market drawdowns as well as to capture a large part of the upside of the asset class. The prevailing market conditions appear as well-suited for this type of investment approach.

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Newsletter | November 2020



Investment perspective

October stood up to its reputation of often being a volatile month for equity markets. Following a positive first half, most equity indices took a turn for the worse and ended the month with losses. European markets underperformed, with the region’s economic outlook being hurt by the introduction of much tougher restrictions to fight against a surge of coronavirus cases. The Euro Stoxx 50 plunged by 7.4% compared to a 3.1% drop for the MSCI World Index in local currencies; emerging markets outperformed strongly as they recorded a 2% monthly gain. Oil prices were hit by demand concerns and fell by 11% over the month. Credit and emerging spreads were stable whereas Bunds and the US dollar logically benefited from their safe haven status.

Markets had to contend with a rising level of uncertainty towards the end of October and volatility levels ended the month considerably higher. On top of the looming issue of the November 3rd US general elections, the hopes for another US fiscal stimulus were dashed and European governments had to react vigorously to the fast spreading of the pandemic. Also, a better-than-expected Q320 earnings reporting season failed to provide additional support for the markets as a lot of good news had already been discounted. The Asian region continued to be the brighter spot for equity markets in reason of its solid economic recovery and a limited impact of the coronavirus pandemic.

At the time of writing this newsletter, results from the US election are yet to deliver a conclusive outcome and the counting of votes could take longer than normal due to an above-average number of postal ballots. Markets have thus far reacted with calm despite the threat of protracted judicial battles by both sides. This reaction could be explained by the likelihood of a divided Congress, meaning that the potential for significant changes to tax policy and to the reg-ulatory framework for sectors such as financials and energy may be reduced.

Investment strategy

As we had expected, equity markets have proven to be more volatile during the recent weeks in large part due to factors mentioned previously. This has translated into increasing concerns about the pace of the economic recovery, in Europe in particular. Several countries have reintroduced lockdowns, and even if they are not as strict as during the spring, they will be detrimental to the near-term economic outlook. In the light of elevated uncertainty, we have reduced our equity exposure back to neutral and boosted our cash position. With the portfolios continuing to hold some protection by way of a January Put spread, we feel well positioned to face a period where volatility could remain well above average.

Within the equity allocation, the exposure to Asia remains overweight and we feel confident about the resilience of Asian markets. The region’s capital markets should continue to benefit from foreign inflows, supportive economic data and lower correlation with European and US markets. The correlation of high-yield bonds with equity markets has also been decreasing recently, a positive development for the portfolios in terms of diversification.


Portfolio Activity/ News

October was a slightly negative month for the portfolios, in large part due to weaker equity markets. The drawdown was limited, however, thanks to strong alpha generation and to the positive contribution from the Put spread. European equity funds were the worst detractors even if they fared better than their respective benchmarks. The largest positive portfolio contributions were provided by emerging, frontier and Chinese equity funds. European investment-grade bonds was another positive contributor as was the US dollar for non-USD portfolios.

Towards the end of the month, we trimmed some of the better performing positions to lock in profits and also cut some underwhelming funds to bring our equity allocation closer to neutral.

This extraordinary year has seen record levels of dispersion within the markets, whether between sectors, strategies, regions and individual stocks. For that reason, it has been most satisfying to observe that many of our active managers have added significant value through their stock picking and their allocations to the different sectors.

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Newsletter | October 2020



Investment perspective

For the first time since the selloff observed in March, global equity markets produced a negative monthly return, with the MSCI World Index in local currencies dropping by 3% in September. US stocks underperformed as the momentum rally led by the technology mega-caps collapsed suddenly; this was reflected by the 5.2% monthly decline of the Nasdaq Composite. Demand for safe haven assets benefited the sovereign debt markets as well as the US dollar, whereas high yield bonds were negatively impacted by the widening of credit spreads. The stronger dollar contributed to extend the profit taking on gold prices, observed since the beginning of August, and also hurt the whole commodities’ asset class.

Year-to-date lagging stocks did not benefit from the profit-taking on the 2020 big winners as no real factor rotation was observed in the equity markets. The rise of the number of new Covid-19 cases, in Europe in particular, continued to weigh on the prices of already depressed stocks in some of the services’ sectors. Weaker-than-expected Eurozone PMI Services data confirmed that the economic recovery already appears to be stalling as more restrictions are being introduced across a number of European countries. In the US, the lack of any agreement on a new fiscal stimulus was a headwind for equity markets as was the rise of political tensions ahead of the upcoming US elections.

The final quarter of the year could prove to be particularly eventful and market volatility is likely to remain elevated. The outcomes of the US election and of the Brexit negotiations are just two of the issues that could have a meaningful bearing on markets on both sides of the Atlantic. A contested result of the US presidential election would be the worst result and would only add to the already high level of uncertainty. Other key ongoing issues include the timing of a new US fiscal stimulus as well as the approval of a widely accepted Covid-19 vaccine.

Investment strategy

The correction of equity markets observed in September does not appear to have fundamentally altered investors’ perspective on the markets. The equity asset class remains the obvious choice in the light of massive monetary support and hopes of additional fiscal stimulus. These factors should not however conceal the fact that the level of uncertainty on a number of issues remains elevated. This largely explains why we continue to hold some optionality in the portfolios to limit the potential damage of a more pronounced reversal of trends. The latest economic data, especially in Europe, are confirming that the recovery is not going to be smooth and that forecasts are prone to be subject to significant revisions. While having only a very limited impact on the markets at this stage, this could change were the economic outlook to deteriorate even more.

Our equity exposure is well diversified. We prefer to spread the risk across a number of regions and strategies rather than rely too much on one particular investment style or on one region. This approach served us well last month as our allocation to Japanese equities provided a significant positive contribution whereas most other equity positions ended the month with negative returns.


Portfolio Activity/ News

September was a slightly negative month for the portfolios due to weaker equity markets. A European value fund was the worst detractor followed by US Growth, US Small Caps and emerging market corporate debt. The trend-following strategy was also a detractor, in large part due to the rebound of the US dollar. The best contributions were provided by Japanese equities with stellar outperformances recorded by two funds. An Asian equity fund also brought a positive contribution as did the US dollar for portfolios referenced in other currencies. The fixed income exposure produced mixed results with high yield and emerging market debt underperforming.

During the past month, we decided to add to the exposure to Asian equities by investing into a China-focused fund. This was financed by trimming some fixed-income positions with limited upside. The Chinese equity market has proved to be resilient and generally less correlated to other equity markets. The lower impact of the coronavirus disease on the Chinese economy relatively to the rest of the world has been one of the drivers of the outperformance of Chinese equities. This factor combined with reasonable valuations should continue to be supportive.

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Newsletter | September 2020



Investment perspective

 Global equity markets performed strongly in August with the MSCI World Index in local currencies climbing by 6.1%. The US stock market had its best August since 1986 as the S&P 500 jumped by 7% and fully erased its losses from the coronavirus pandemic to hit new record highs. European stocks underperformed (+ 3.1% for the Euro Stoxx 50) and still remain below the levels observed in early June. Sovereign debt markets experienced a quite volatile month and the yields of long maturity bonds ended the month higher. The depreciation of the US dollar was extended throughout August and the euro ended the month with a 1.3% gain. 

Once again US equity markets were caracterized by the significant out-performance of the Nasdaq indexes and of the technology sector in particular; the Nasdaq Composite Index rose by 9.6% while the S&P Technology Sector Index climbed by 11.8%. Outstanding performances within the market were recorded by companies such as Tesla (+74%), Salesforce (+ 40%), Facebook (+ 16%) and by the biggest of them all, Apple (+ 21%). It was also revealing that the level of implied volatility of the US market, measured by the VIX Index, rose in tandem with equities during the second half of the month. Simultaneous increases in equity and volatility gauges are unusual and the move in the volatility measure may have been the result of investors chasing the rally. 

As widely expected, Federal Reserve Chair Jerome Powell announced a major shift in the way the central bank aims to achieve maximum employment and stable prices. During the virtual Jackson Hole Symposium, Powell said that the Fed would adopt a form of average inflation targeting regime, meaning that inflation will be allowed to go “moderately above” its 2% target after periods of persistently low pricing pressures. The Fed also signalled that employment can run stronger without setting off unwanted spikes in inflation. This means the Fed won’t be raising rates anytime soon and would not increase rates or brace for a rise in inflation even as employment levels strengthen. 


Investment strategy

The summer months have seen financial markets continuing to claw back their February and March losses. We did not change the structure of our portfolios but have added to our portfolio protection by covering the short September S&P Put option and by initiating a new January S&P Put spread. Our assessment of the current market conditions is torn between the logic of rising asset prices as a result of massive liquidity injections and our rising concerns about stretched valuations. This largely explains why we feel it is critical to hold some protection as a way of limiting the damage that a potential reversal of prevailing market trends would trigger.

We are getting closer to reducing our US dollar underweight for non-USD denominated portfolios. The Dollar Index has been depreciating since its peak observed in March and the move appears to be getting long in the tooth. The positioning of traders on the dollar is extremely short and thus reduces the likelihood of further immediate depreciation. For the EUR/USD parity our target for some dollar buying is around the 1.20 level.


Portfolio Activity/ News

August was a very strong month for the portfolios as only a small minority of underlying funds ended the month with modest negative returns. Within the equity asset class, US, Japanese and Frontier Market equities as well as European Small Caps produced the highest contributions. Significant contributions were also generated by a Long/Short equity strategy, European Value equities and by a thematic fund which was launched in the summer. Two fixed-income funds with longer duration and the trend-following strategy were small detractors, resulting largely from the rising yields of sovereign debt.

During the past month, we extended our Put spread strategy from a September expiry to a January one. We also approved a fund whose investment universe includes the world’s most valuable brands (global, upcoming and digital brands) as well as a Biotech fund. We have also purchased recently a thematic fund which invests into equities benefiting from secular growth opportunities, with a focus on the technology, healthcare and renewable energy sectors. The manager’s research and investment approach is original as it draws scientific, technological and industrial research together with financial analysis. Their process starts with the generation of ideas by scientists within their field of competence before financial analysts then conduct traditional financial research.


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Investment Perspectives 2020 | Mid-Year Review & Outlook

Executive Summary

The economy has been hit by a “black swan” event

The first half of 2020 has been a most extraordinary period as the global economy was temporarily brought to a standstill. Governments took unprecedented lockdown measures to limit the spreading of the Covid-19 coronavirus and this pandemic represents a “black swan”, defined as an unpredictable event with potentially devastating consequences. The global economy is currently going through a recession, which should prove to be extremely severe but also extremely short. Global GDP is expected to contract by around 5% in 2020 compared to projections of 3% growth before the Covid-19 shock, with a strong rebound expected from a 2020 Q2 trough into 2021.

A war-like effort from monetary and fiscal authorities to fight the Covid-19 pandemic

The responses of the central banks and governments to limit the economic damage from the pandemic were extremely quick and on a scale never observed previously. The main central banks deployed the full range of their crisis tools within weeks. The US Fed funds rate was slashed to zero, massive quantitative easing was reintroduced and a broad range of additional measures were taken; these significant interventions contributed to improve the functioning of markets which had been under acute stress in March. Governments also acted promptly and decisively. Between early February and early April, G20 governments announced nearly 8 percent of 2019 G20 GDP in fiscal support, with this percentage now exceeding 10% following the addition of new plans. Global fiscal packages are estimated to be worth around $9 trillion, with the G20 economies accounting for the bulk of this amount: $8 trillion .

Equity markets have moved in both directions at record speeds

Financial markets went into a tailspin in February after having ignored the Covid-19 risks for some time. Equity markets plunged by over 30% in a matter of weeks as investors came to terms with the devastating impact of the pandemic on the world economy. The market correction was amplifed by the unwinding of a high level of leverage and all asset classes were caught up in the turmoil during a brief period in March. Equity markets then rebounded at a pace never seen before during equity recoveries following a bear market; this rally has been driven by the drastic measures taken by central banks and governments. Financial conditions are now very supportive for capital markets but question marks over the sustainability of the rally of equities remain. There is also a distinct risk that markets have become far too reliant on all these supports, in view of weaker economic fundamentals.

We maintain portfolio hedging in view of elevated uncertainty

Thanks to our quick hedging we did not have to sell positions. We were thus able to hold onto our long term convictions and our option protection strategy greatly reduced the volatility of portfolios. We recognize that markets are being driven by a huge wave of monetary and fiscal support, but we believe that they are not taking account of a number of risks which could ultimately have a significant impact. That explains why we hold a neutral equity exposure combined with a put spread to limit the potential downside risk; in an environment fraught with uncertainty and in view of expensive valuations, we consider the management of portfolio risk as paramount. In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.


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Newsletter | June 2020



Investment perspective

Global equity markets extended their rally in May and proved to be resilient to any negative news. Emerging markets underperformed as Chinese and Hong Kong stocks were negatively impacted by rising US-China tensions and Indian stocks were hit by COVID-19 concerns. Government debt markets were quite stable while HY and EM debt performed strongly during the second half of the month. In spite of this significant risk-on environment, the price of gold appreciated modestly, in part the result of a weaker US dollar. A proposal from Brussels for a €750 billion recovery fund, earmarked for the struggling economies of southern Europe, contributed to a strong end to the month for European assets, with the euro recording a 1.3% monthly gain against the US dollar. Finally, oil prices staged a spectacular rebound following a turbulent month of April; the price of a WTI barrel climbed by over 88% thanks to the combined effects of a recovery of demand and significant production cuts.

The acceleration of the re-opening of Western economies has been the main driver for risk assets; the markets’ belief that central banks are prepared to provide more support and that additional fiscal packages will be rolled out are other reasons behind the powerful ongoing rally. The markets have, at least so far, brushed aside the significant rise of tensions between China and the United States. The US has blamed China for the spreading of the COVID-19 coronavirus and also accused China of not respecting the terms of the 1997 Hong Kong handover agreement by imposing a new security law. Markets also appear to be currently ignoring all economic fundamentals, concerns over a second wave of the coronavirus, uncertainty over the timeline and availability of a vaccine, trade threats and near-term corporate profitability.

A lot has been written recently about the outperformance of the Growth style over Value this year, as well as over a much longer period, but there are some signs that Value could be starting to catch up a little. Sectors such as Energy, Financials, Industrials, Materials and Autos have been picking up steam and outperforming other sectors such as Consumer Staples and Healthcare which have been more resilient since the beginning of the year.

Investment strategy

We did not change the positioning of our portfolios in May and have kept in place the Put protection for around half of the equity allocation. The maturity and the strike of the Put option have been adjusted after we took some profit on the Put option initially bought in early-March. The result since this switch has been for the value of the portfolios to benefit from the higher appetite for risk assets and for the declining value of the Put option to represent a small opportunity cost. We feel very comfortable with the current positioning as we remain somewhat wary of the one-way direction of equity markets and of their increasingly demanding valuations.

The rally of equities has been accompanied by a rally of high yield and emerging market bonds since the middle of May; we had maintained our exposures to both asset classes after the market correction. The valuations of both asset classes are attractive in view of the high level of spreads and default expectations which are close to maximum levels observed on a historic basis.


Portfolio Activity/ News

Portfolios continued to make up lost ground in May as nearly all the underlying positions ended the month with positive returns. Within the equity asset class, Japanese equities, US and European Small Caps as well as Growth stocks produced the highest contributions. Significant contributions were also generated by various fixed-income exposures with emerging markets' corporate bonds, global convertible bonds and high yield credit performing the best. Some alternative strategies which had posted strong performances during the correction of the markets ended the month with limited negative performances. We cut our exposure to the Risk Premia hedge fund strategy because of a combination of disappointing performance and of the strategy’s dwindling assets under management.

In a context of rallying equity markets and lower volatility, the biggest detractor for the portfolios was logically the Put position which serves as a protection for part of the equity allocation. During the month, we rolled over our position by selling the S&P 500 June 3’000 Put option in favour of a S&P 500 September 2’750 one.

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Newsletter | May 2020



Investment perspective

The late-March rebound of equity markets was extended in spectacular fashion during April. The MSCI World Index recorded a 10.4% monthly gain, with US equities outperforming under the leadership of the stockmarket’s ubiquitous heavyweights. In contrast, the improvement of bond markets was more muted and sovereign debt yields ended the month slightly lower. Gold prices held on to strong early-month gains to end the month 7% higher. Oil markets were particularly eventful. The expiration of May WTI contracts triggered a stampede for holders of these contracts as they were unable to take physical delivery of oil; with US storage in Cushing being close to capacity, investors had no choice but to liquidate May contracts at all costs, with the result that prices traded as low as negative $38, an event which had never been observed before. Finally, currency markets regained their composure and the main FX crosses ended with small monthly changes.

The April rally of equities was largely a result of the massive support from the main central banks and from governments. Unprecedented liquidity was provided by the Federal Reserve and by the ECB in order to bring stability back into bond markets and to enable companies to access credit again. Markets were also driven by the evolution of the coronavirus pandemic; an increasing number of countries observed sufficiently positive results from their lockdown measures to start gradually lifting some of the restrictions in an attempt to restart their economies. Optimism over an anti-viral treatment also contributed to market euphoria, despite the publication of economic data showing that the fallout from the shutdown of the economy had been more severe than expected, already during the first quarter: US Q1 GDP contracted by 4.8% and Eurozone GDP by 3.8%. The Q1 earnings season is well advanced and, while it is difficult to characterize the extremely diverging set of results, markets have largely taken them into their stride. The most striking aspect of this reporting season has been the inability of companies to provide guidance in view of the extremely uncertain environment.

The chart shows the year-to-date returns of the Nasdaq Composite, the Euro Stoxx 50 and the Russell 2000 Value. The outperformance of the Nasdaq Com-posite Index has been large and results mainly from its overweight exposure to the technology sector. The broader US equity market has also rebounded much more strongly than those of other regions, including Europe. Finally, “Value” has continued to underperform “Growth”, with the spread between the valuations of both investment styles reaching a multi-decade extreme.

Investment strategy

The strong rebound of equity markets, US ones in particular, would suggest that a more optimistic scenario, where both the economy and the profitability of companies recover quickly, is being priced in. One must however pay attention to what has been driving these gains and a disproportionate part of the outperformance of US equities has been provided by the five mega-caps: Facebook, Alphabet, Amazon, Apple and Microsoft. Were these stocks to weaken, the rest of the market would likely be dragged down as well.

The path of the global economy in the months ahead is very difficult to predict but we believe that a quick return to pre-pandemic activity levels is unrealistic. It will take a long time for certain sectors to fully recover and higher unemployment will affect consumer spending, the largest GDP component. We consider that equities are richly valued, in view of the elevated level of uncertainty, and we continue to exercise caution by holding on to our equity protection.


Portfolio Activity/ News

April was a strong month for the portfolios which recovered part of their March losses with nearly all underlying positions recording positive returns. The largest contributions were provided by the US Value strategy, US and European Small Caps and US Growth funds. Japanese and Frontier markets equity funds also fared well. All bond funds ended the month with gains as the massive liquidity provided by central banks contributed to reestablish some stability in the fixed-income markets; high yield and senior secured debt rebounded well whereas convertible bonds have showed their resilience with limited year-to-date drawdowns. The investment into gold in March also proved to have been opportune.

Following their strong showing during March, some of the alternative strategies gave back some of their year-to-date gains. The biggest detractor for the portfolios was logically the Put position; its value consistently depreciated during the month as equity markets moved higher and as volatility decreased from extreme levels.

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Newsletter | April 2020



Investment perspective

March was the most dramatic month for capital markets since October 2008. The end-February plunge of equity markets spread across all the other asset classes and only very few managed to end the month with gains. Chaos was observed even in the markets of the safest assets, as a result of panic selling to raise cash at all costs; 10-year Treasury yields initially fell from 1.14% to an all-time low of 0.32% before jumping back up to 1.3% to then end March at a level of 0.67%. The price of gold dropped by 12% within seven trading days as margin calls forced investors to liquidate positions. Huge volatility was also observed in the currency markets, due to a rush for dollars, and the EUR/USD parity traded within a wide range of 1.06 - 1.15. The coronavirus Covid-19 pandemic was obviously the driver of market stress, but this was also compounded by the collapse of oil prices; Russia walked away from OPEC + discussions over a Saudi proposal for additional production cuts. This outcome resulted in oil prices dropping by more than 50% in March.

In contrast to what took place during the great financial crisis in 2008, fiscal and monetary authorities have been very quick to respond. Record-breaking aid packages and unprecedented support for financial markets have been announced. The Federal Reserve slashed interest rates by 1.5% to zero in two emergency moves and has committed to an unlimited expansion of its bond purchasing programs. US Congress voted in favour of a $2 trillion Coronavirus aid package and is already considering doing more. After a stuttering start in its answer to the crisis, the ECB also ramped up its asset purchase program, which now amounts to € 1’100 billion. In Europe, governments have taken a broad range of measures to support households and companies, destined in particular to prevent massive unemployment. On a less positive note for the Eurozone, a proposal to issue “Coronabonds” in order to drive down the borrowing costs for some of Europe’s most heavily affected countries was rejected by Germany, the Netherlands, Austria and Finland.

The chart above illustrates the speed of the equity market correction from its February 19 peak; the S&P 500 Index plunged by 34% until March 23 before rebounding by 15.5% to end with a monthly loss of 12.5%. This was the fastest stock market correction in history and reflects the huge pressure on equity prices in reason of massive deleveraging, deep rebalancing across a range of strategies and outright selling. An end of month/quarter rebalancing in favour of equities was also likely the main driver of the late month rebound.

Investment strategy

Our allocation to equities has been significantly underweight since March 3rd when we covered half of their exposure by the purchase of an end of June S&P 500 Put, strike 3’000. The equity allocation of our balanced model portfolio was thus reduced to 23%; following the correction of equity markets, the net exposure to equities has now dropped to below 20%. For the time being we are maintaining this protection in view of extreme uncertainties. The impossibility to determine the length of widespread confinement measures, their ultimate impact on the economy as well as a total lack of visibility on future earnings are the key reasons for our cautious stance.

The management of the Put position is our main focus and, were markets to fall further, we are prepared to lift at least some of this protection. We are also willing to be proven wrong if equity markets were to rebound strongly, with the result that the hedge would then represent an opportunity cost for the portfolios. We have also been actively engaging with the managers of our funds to make sure they are not facing undue redemption pressures and, so far, we have been reassured that this has not been the case.


Portfolio Activity/ News

March was a very difficult month for the portfolios as all asset classes found themselves under huge pressure. With virtually nowhere to hide, we were relieved that we had partially hedged the equity exposure and that some of the alternative strategies (L/S, CTA & Global Macro) proved to be very resilient and able to generate positive monthly returns.

Some fixed income positions were badly hit, high yield credit and emerging market debt in particular, as market liquidity evaporated. On a more positive note, active managers have been much less impacted by redemptions than ETFs, which often traded at levels well below their net asset value. Bond markets are gradually returning to normal thanks to the actions of the central banks, but market conditions remain very challenging nevertheless for the riskier segments.The performance of equity funds was very heterogeneous. US value and frontier markets were the biggest detractors while Japanese equities, US Small Caps, Healthcare and US Growth managed to limit the drawdowns.

During the month, we opportunistically took advantage of the steep drop of the price of gold to reinitiate a position in physical gold for some portfolios. Negative real interest rates, currency debasement concerns and exploding budget deficits should all provide a supportive framework for real assets such as gold.

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