Just as a deep-sea diver would take an additional tank of air, increased exposure to risk requires extra downside protection, says Mark Pearce, investment director at Ardea Investment Management.
Increasing allocations to corporate credit has been a key theme in recent months, with sentiment towards investment grade credit remaining positive despite an uncertain economic outlook.
Perhaps this should be of no surprise?
Central bank policy designed to control inflation has driven interest rates upward and bond yields in the developed world are at a decade high. So, if you are in the camp that buys into forecasts for a soft landing, then investment grade credit makes a great deal of sense.
Higher quality issuers should easily withstand a mild downturn in economic growth and any reversal of recent interest rate hikes should be good for fixed income investors: bond yields down, bond prices up.
But what happens to corporate debt if the forecast soft landing turns into a nasty fall, or some other variable causes a sell-off similar to what we saw during the Covid downturn, or worse, the financial crisis of 2008?
We believe that any increased exposure to riskier assets, corporate bonds or otherwise, should be accompanied by an increase in downside protection in the same way a deep-sea diver may carry an additional tank of air, or a motorsport team may install bigger breaks after turbocharging an engine.
Ardea’s relative value fixed income strategy offers that protection. Our approach, described as pure relative value, does not rely on macro-economic forecasts to generate performance, which means the strategy has a low correlation with traditional bond market products. We target consistently low performance volatility and offer reliable daily liquidity, even during periods of extreme stress.
Furthermore, by embedding optionality within our relative value framework, we have been able to generate strong positive returns when bond markets have deteriorated. The LDI crisis of 2022 and banking crisis of March 2023 are perfect examples where riskier segments of the market suffered and Ardea’s relative value approach has generated strong positive returns.
In the current environment, we believe a low correlation to traditional asset classes is a crucial element in reducing portfolio volatility, as is the ability to find an alternative source of performance when the traditional levers of fixed income investing – duration and credit – are failing to add value.
The Ardea Global Alpha Fund (UCITS) offers investors an alternative to conventional fixed income portfolios – a third lever – by providing access to a highly differentiated source of performance, a consistent focus on downside protection and the option of both accumulating and income share classes, with the latter targeting a distribution of 4% per annum.
Ardea Investment Management are sponsoring Room151’s Monthly Online Treasury Briefing on Friday 24 November. Click here for the agenda and more information on the event.
—————
FREE weekly newsletters
Subscribe to Room151 Newsletters
Follow us on LinkedIn
Follow us here
Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address
Room151 Webinars
Visit the Room151 channel
Disclaimer: This document relates to the Ardea Global Alpha Fund, which is a sub-fund of Fidante Partners Liquid Strategies ICAV, and associated strategies (the “Fund”). Ardea Investment Management Pty Ltd ABN 50 132 902 722 AFSL 329 828 is the investment manager of the Fund (the “Manager”) and has approved the contents of this document. In the United Kingdom this document is issued and approved by Fidante Partners Europe Limited (“Fidante UK”). Fidante UK is authorised and regulated by the Financial Conduct Authority in the conduct of investment business in the United Kingdom. In the European Union this document is issued and approved by Fidante Partners AB (“Fidante Sweden”). Fidante Sweden is an investment firm authorised by the Swedish Financial Supervisory Authority (Finansinspektionen). Fidante Sweden is authorised to provide investment advice, reception and transmission of orders and execution of orders on behalf of customers. Fidante UK and Fidante Sweden (Fidante) approve this document on the basis of the accuracy of information provided by the Manager. Fidante are distributors of the Fund and are issuing in this capacity only.
The information and opinions contained in this document are for background purposes only and do not purport to be full or complete. No reliance may be placed for any purpose on the information contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by Fidante or any of its affiliates or any vehicle and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions.
This document does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase, any shares or any other interests nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefore. Recipients of this document who intend to apply for shares or interests in the Fund are reminded that any such application may be made solely on the basis of the information and opinions contained in the prospectus or other offering document relating thereto, as and when they become available, which may be different from the information and opinions contained in this document.
Historical returns are no guarantee of future returns. The money invested in the fund can both increase and decrease in value and it is not certain that you get back all the invested capital. If you are in any doubt about the suitability of investing, you should seek independent advice. There are no entry or exit fees for the Fund.
The value or price of the financial product, as well as the prospectus, documents and KIDs/KIIDs can be obtained free of charge at: https://www.fidante.com/ucits.
If you wish to make a complaint, please contact our team at: Complaints-europe@fidante.com.
UK investors only
This document is a financial promotion for the purposes of the Financial Services and Markets Act 2000 (FSMA) and has been issued for the sole purpose of providing information about the Fund. This document is issued in the United Kingdom only to and/or is directed only at persons who are of a kind to whom the Fund may lawfully be promoted by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (including authorised persons, high net worth companies, high net worth unincorporated associations or partnerships, the trustees of high value trusts and certified sophisticated investors). This document is exempt from the general restriction in Section 21 of FSMA on the communication of invitations or inducements to participate in investment activity on the grounds that it is being issued to and/or directed at only the types of person referred to above. Shares or interests in the Fund are only available to such persons and this document must not be relied or acted upon by any other persons.
