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When volatility is a good thing
Global volatility is resulting in divergent returns in financial market assets and differentiation in performance. Below we look to explain how this backdrop creates opportunity, and how our Absolute Return Bond fund benefits from this market environment.
Generating alpha requires both volatility to be present in the opportunity set and positive manager skill. And the good news is that with many uncertainties around the likes of the path of central bank policy, economic growth, inflation, and indeed politics and geopolitics, volatility looks set to continue. This environment is particularly attractive for our active investment grade propositions, with plenty of alpha to capture by our very stable, experienced investment team. The team has been running absolute return funds, alongside traditional benchmarked strategies, for over 20 years, using a proven, strong, disciplined investment process.
Comprising 26 specialists who focus on the universe of global rates, sovereign and corporate credit and currencies, the team is part of the broader BlueBay fixed income platform, which comprises 128 investment professionals and manages over USD125 billion in assets1. The team is structured to deliver outcomes tailored to meet clients’ needs and operates according to a single investment process. We believe that having one team of specialists using this single process gives us a more holistic and nuanced approach to decision making.
Our Investment Grade Absolute Return fund has been designed to generate returns of cash plus 3%, with volatility of 3%, through active management. We use long and short positions to reflect high conviction investment ideas coming from our investment process. Approximately half the targeted return is expected to come from bottom-up sector and issuer selection, with the other half from macro and policy analysis and themes. Return potential is not a function of actual market yields, but rather we seek to capitalise on the movement of yields, credit spreads and currencies. As such, it is volatility, divergence, and issuer and sector dispersion that provide the opportunity for positive returns.
Over time, clients investing in this strategy have done so to fulfil various needs. For years, the main reason was as an alternative to traditional beta-driven funds i.e. to obtain fixed income exposure but without taking exposure to embedded duration risk (driven by the fear of higher interest rates) and credit risk, which are features of a benchmarked fund.
Clearly, with yields having repriced much higher in 2022 and rates having peaked, this is a less of a concern for investors currently. However, there is still demand on the back of the fear that rates could go higher, or more likely, that with multiple rate cuts already priced in by the market, there is room for disappointment and so higher yields. In this context, a cash plus return when the curve is inverted could provide attractive returns, and indeed, the non-correlation dynamic could lead investors to hold such funds as a diversifier. With rate cuts priced into bond yields, and therefore inverted curves, our fund, which seeks to generate returns by monetising volatility in markets, remains an attractive prospect.
At a broader level, we still see investors using ‘’liquid alts’ funds for diversification benefits, which comes from the low correlation to fixed income market returns and, in some cases, we see investors using the fund as an enhanced vehicle for cash that will not be needed in the short term.
As we go into the second half of the year, we continue to see scope for volatility, and this could benefit a fund that looks to monetise volatility through manager skill in investment decision making, and so is able to generate returns in all market conditions.
1. RBC GAM, as at 31 May 2024.
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This document is a marketing communication and it may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (BBFM S.A.), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany, Italy, Spain and Netherlands the BBFM S.A is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by RBC Global Asset Management (UK) Limited (RBC GAM UK), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts at the registered office of the Swiss representative or at the registered office or place of residence of the investor shall have jurisdiction pertaining to claims in connection with the offering and/or advertising of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), the Packaged Retail and Insurance-based Investment Products - Key Information Documents (PRIIPs KID), where applicable, the Articles of Incorporation and any other document required, such as the Annual and Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Asia, by RBC Global Asset Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong. In Australia, RBC GAM UK is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, by RBC Global Asset Management Inc. (including PH&N Institutional) which is regulated by each provincial and territorial securities commission with which it is registered. RBC GAM UK is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits RBC GAM UK to carry out certain specified dealer activities for those Canadian residents that qualify as "a Canadian permitted client”, as such term is defined under applicable securities legislation. In the United States, by RBC Global Asset Management (U.S.) Inc. ("RBC GAM-US"), an SEC registered investment adviser. The entities noted above are collectively referred to as “RBC BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of RBC BlueBay by the respective licensing or registering authorities. Not all products, services or investments described herein are available in all jurisdictions and some are available on a limited basis only, due to local regulatory and legal requirements.
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