The Hedgeweek Interview: Tim Haywood & Paul McNamara, Julius Baer Investments Limited: Seeking Opportunities across the Globe
Tim Haywood & Paul McNamara believe the continuing focus on absolute returns coupled with a greater volatility of returns will work in favour of their Absolute Return Bond Fund.
Tim Haywood, Chief Investment Officer, Julius Baer Investments Limited, joined the company in January 1998 from Orient Overseas International Limited in Hong Kong where he was Chief Investment Officer for four years. Previously Tim worked for Chemical Bank together with Edward Dove. Tim's professional investment experience commenced in 1988. He has an MBA from the University of Cranfield. Tim was responsible for JBIL's absolute return strategies and runs the Julius Baer Diversified Fixed Income Hedge Fund with Tom O'Shea and the Absolute Return Bond Fund with Paul McNamara. Tim was appointed CIO in January 2005, and is responsible for the investment aspects of all accounts.
Paul McNamara, Portfolio Manager, joined JBIL in 1997 from the Export Credits Guarantee Department, where he worked in a similar position. Paul holds a Master's Degree in Economics from the London School of Economics. After completing this in 1991, he spent three years lecturing at the University of Warsaw before returning to the UK to work as a macroeconomist in the Government Economic Service. Within JBIL, Paul leads the emerging market effort, and also co-manages the Absolute Return Bond Fund. Paul joined the industry in 1994.
HW: What is the background to the fund?
TH & PM: The name of the fund is Julius Baer Absolute Return Bond Fund. The inception date of the fund is 30th April 2004. The current AuM (as of 31st March 2006) is €3,098 million. The fund's strategy is Global Fixed Income long/short and its Return Objective is 3mth Euribor +2-3% per annum.
HW: Who are your service providers?
TH & PM: Our Auditors are PriceWaterhouse Coopers and Legal Advisors are Simmons & Simmons, Maples & Calder, Kirkpatrick & Lockhart Nicholson Graham. Our custodian is Northern Trust Fiduciary Services Limited
HW: How and where do you distribute the fund? What is your current and targeted client base?
TH & PM: The Absolute Return Bond Fund has distribution stations in Switzerland, Germany, Italy and Spain. It is sold by Bank Julius Baer to approved buyers who want either enhanced cash returns or want superior ways to manage intermediate bonds.
HW: What is the investment process for your fund?
TH & PM: The Absolute Return Bond Fund is a Luxembourg-listed SICAV fund regulated under UCITS III law, which aims at generating positive absolute returns every calendar year.
Our investment philosophy covers the three essentials of portfolio management - markets, process and organisation.
- Firstly we seek opportunities across the globe in all sectors of the bond market. We view currency as a separate asset class.
- Our Investment process is driven by fundamental analysis. Microanalysis is used to enhance returns.
- We believe in the team approach to global portfolio management.
For all of our fixed income products a strong top down investment approach is followed. For sectors with an important focus on security selection like corporate bonds (investment grade and high yield), emerging market debt and convertible bonds a bottom up process is implemented in addition.
Adopting a strong team approach, investment decisions are made formally at the monthly strategy meeting, the weekly team investment meetings and on a live basis in the course of normal daily activity. Weekly monitoring meetings ensure consistency between strategy and implementation.
HW: How do you generate ideas for your fund?
TH & PM: The portfolio management team is organised along specialist areas and sources with the Absolute Return Bond Fund managers drawing from this specific expertise. Coupled with this there is a monthly inter office investment strategy meeting that sets broad investment themes which are in turn implemented by the investment management team.
HW: What is your approach to managing risk?
TH & PM: Risk Management forms an integral part to our investment process. The objective is to assess from an ex-ante perspective how much performance volatility is to be expected for a portfolio. We use the RiskMetrics software in order to calculate risk both in absolute (value at risk) as well as in relative terms (tracking error). It uses a 30-day horizon and a one standard deviation confidence interval. The model portfolio is expressed as a series of trades in each area of alpha with absolute risk (VAR) and tracking error identified to each individual trade. This ensures that risk is not disproportionately attributed to one trade and is consistent with our return expectations. The risk reports for the Absolute Return Bond Fund are performed on a daily basis.
HW: How/against what do you benchmark the performance of your fund?
TH & PM:The Julius Baer Absolute Return Bond Fund is benchmarked against the 3 month Euribor.
HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?
TH & PM: Absolute Return Bond Fund target: 3 month Euribor plus 2 - 3% per annum. 2005 Performance (net of fees) as at 31/12/05: 6.89% in Euro terms.
HW: What opportunities are you looking at right now?
TH & PM: UK: breakeven inflation story and spread between nominal govt bonds to inflation linked bonds. Also feel it less likely that there will be rate cuts and as such being short outright and relative in the front end of the curve.
Euro: Do not expect start of Fed style interest rate hike and expect only modest interest rate adjustments in 2006. Long Duration via calls.
Canada: short front end (expensive bond market) in a strong economy but long the currency.
Japan: Short JGBs via futures but long the currency.
Scandinavian currencies: long SEK and NOK.
Mexico: Bonds more appealing than FX on a risk adjusted view. Expect to add Mexican exposure on or around election time.
US: Positioning for a strategically weaker currency as we see the end of the Fed tightening. We are tactically flat as speculative shorts abound.
Credit: Outside of financials, we see little value. The ARBF is thus long protection (short credit)
Convertibles: low implied volatilities combined with significant M&A activity should lead to higher realised volatility. We like Japanese banks via synthetic issues. We also like very high quality issues such as KFW in Europe.
HW: What events do you expect to see in your sector in the year ahead?
TH & PM: The continuing focus on absolute returns coupled with a greater volatility of returns.
HW: How will these changes/future events impact on your own portfolio?
TH & PM: We have a long volatility bias as seen through bond calls, CDS and long convertibles.
HW: What differentiates you from other managers in your sector?
TH & PM: We have:
- Long standing expertise in managing Absolute Return orientated fixed income portfolios.
- Return orientation as opposed to risk budgeting approach.
- Compact, stable team focussed on global fixed income management exclusively.
- Our managers are either former economists or long term practitioners within their sectors, thus nearly all ideas are self-generated: less reliance on external ideas.
HW: Do you have any plans for similar/other product launches in the near future?
TH & PM: We look to launch products to meet these needs. Specifically USD, GBP and AUD Absolute Return Bond offerings, with products suitable for onshore and offshore investors.
(Tim Haywood & Paul McNamara were interviewed on 6 April 2006; the interview was revised on 25 May 2006)
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