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Emerging market debt opportunities

In this week's episode of Dolfin Discussions Geoff Wan, Fixed Income Analyst at Dolfin, is joined by Richard Briggs, Investment Manager, Emerging Market Debt at GAM Investments and Bennett Lim,...

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Dolfin’s response to Covid-19

We will safeguard the wellbeing of our team, continue to act as responsible members of the global community, and deliver uninterrupted, high-quality service to our clients and partners.

Update on model portfolios

Investment outlooks / Q2 2020
  • Our EUR denominated client portfolios were the weakest performing on a comparative basis
  • Our USD denominated conservative and balanced models had a high allocation to government bonds and held up very well in March with the models finishing the month in positive territory
  • Our GBP models had the longest duration of the three different sets and consequently held up well

Last quarter I concluded my update writing that, “in 2020 we remain cautiously positioned and believe that this will be a year to be nimble. The concept of only buying what we want to buy, when we want to buy it will be an important mantra.”

I suspect that last quarter will go down in infamy given the speed of the spread of the coronavirus and its impact on financial markets. Working on multi-asset models at times it felt like no part of the market was left untouched and unimpacted. It was a brutal market to have exposure to but the fear of missing out appears to have persuaded many investment managers to participate in the volatility rollercoaster that we saw in the run in to the end of the quarter.

We implemented adjustments on every single discretionary portfolio in Q1 2020, and we started and finished the quarter with a minimal exposure to equities and far lower than most other managers. Our start point in equities was to be heavily underexposed as we believed that markets were very stretched from a valuation perspective; for our conservative models this meant single digit equity exposure.

Performance numbers

Click table to expand. P = Portfolio RI = Reference Index * 12 months rolling as at end March 2020. All performance is quoted gross of fees. For further details, please refer to the important information section.

Although we didn’t predict the virus outbreak, we responded swiftly to it as we could see the potential size and scale of the impact. Before we saw the worst of the market declines, we had sold energy and mining names on the fixed income side and removed high yield exposure from our discretionary models to increase the credit quality we were holding.

“We expect to see bankruptcies in the shale energy sector.”

On the fixed income side, we had rotated out of USD high yield in November 2019 into EUR high yield as we were concerned about the high level of exposure in the USD high yield space to energy and mining companies. This was a positive decision given the movements that we have seen in the energy space and the poor performance of the US high yield. We expect to see bankruptcies in the months to come in the shale energy sector. However, with some of the market dislocations that we were looking at we also took the decision to sell out of our EUR high yield exposure across all of our models before liquidity dropped out of the market.

On the equity side, we had very little to sell but trimmed down what we could so that we were at bare bones. When I write ‘bare bones’ I don’t meant a minimum allocation to equities as we run our models on an absolute return basis with the ability to have 0 per cent held in equities should we so choose. We sold down equities so that we were only owning the key stocks that formed part of our Coronavirus strategy. For clients this meant that for a period many of them had their entire equity exposure formed by two single stocks – EA and Tencent. Even for many of our growth clients this meant that their equity exposure was also in single digits.

Since the middle of February, we have been developing our Coronavirus redeployment strategy. We looked globally for stocks that we felt were unlikely to be negatively impacted by the global downturn and might even be suited to the current environment. In the second half of March we dipped our toe back into equity markets through the purchases of MasterCard, Amazon, Alphabet, JD.com and Alibaba across all of our global multi-asset models. These stocks all form part of our Coronavirus resilient basket that we have developed, and we only purchased one tranche with the aim of purchasing additional tranches when markets decline further.

“We sold all exposure to energy, mining and tourism that we believed would struggle.”

We reviewed our UK-only portfolios to make sure we had either very short dated high quality energy names, otherwise we sold all exposure to energy, mining and tourism that we believed would struggle in the coming months. Even if the bond prices ultimately recovery we sold them to mitigate any future client concerns on any drawdown in their portfolio value – however temporary.

Sadly, whilst our actions mitigated a huge part of the decline, we were unable to avoid some aspects of the market volatility.

EUR models

In Europe, with sovereign yields so low and our refusal to purchase negative nominal yielding instruments for our clients, some of our core fixed income holdings suffered. The Italian government bonds understandably sold off given recent events. This did mean that our EUR denominated client portfolios were the weakest performing on a comparative basis with all of our models showing negative performance in March.

USD models

Our conservative and balanced models had a high allocation to government bonds and held up very well in March with the models finishing the month in positive territory. The largest holding was a 3-month Treasury bill which matures in April. To combat the 1.50 per cent of rate cuts the Federal Reserve instigated between meetings we have adjusted our short dated fixed income strategy to roll into a diversified portfolio of short dated (less than 12 months) investment grade bonds. This provides a yield pick up of circa 100bps with limited downside volatility given the short date until maturity.

GBP models

Our GBP models had the longest duration of the three different sets and consequently held up well – also helped by the depreciation of GBP that we witnessed in March. Like the USD, and like the EUR portfolios already have been, we have developed our short-dated Treasury bill equivalent strategy denominated in GBP to offer additional yield with minimal additional credit risk given the short duration of the holdings.

“We are still building up positions in our coronavirus resilient basket as we believe there is more downside to come.”

Looking forward into Q2, I suspect that we have not seen the worst of it yet and I anticipate that markets will experience more volatility when earnings and guidance start being released by companies along with more economic data which will make the scale of the downturn clear. I finish this quarter as I finished last quarter – this remains a time to be nimble and to buy what you want to buy. We are still focused on building up positions in our coronavirus resilient basket as we believe there is more downside to come. When we believe markets have troughed, we will switch across to building up our coronavirus recovery basket.

 


 

Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. If the information is not listed in your base currency, then the result may increase or decrease due to currency fluctuations.

If not otherwise indicated, all graphs are sourced from Dolfin research, April 2020.

Please read this important information and our disclaimer.

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