The Interview - Ralph Gasser, Bank Julius Baer: "Clients are increasingly willing to add risk again cautiously"

The five-year-old Julius Baer Absolute Return Bond Fund managed by London-based Augustus Asset Managers has delivered euro-denominated returns of 3.8 per cent over the past three months and 6.6 per cent over the past six months, while keeping volatility in its target range. Bank Julius Baer fixed-income product specialist Ralph Gasser expects performance to remain strong, given the sheer magnitude of pricing dislocations across the markets in which the fund invests.

HW: What is the background to your company and fund?

RG: The Julius Baer Absolute Return Bond Fund is managed by London-based Augustus Asset Managers, formerly Julius Bär Investments, a 100 per cent subsidiary of GAM (UK), a wholly-owned subsidiary of Julius Baer Holding. The roots of Augustus Asset Managers date back to 1983.

The firm is a specialist boutique covering fixed income and currencies with longstanding track records in both long-only and relative investment strategies. Overall, Augustus Asset Managers has 15 portfolio managers with an average of 16 years' investment experience and eight years' company affiliation.

Assets under management amount to approximately USD8bn, of which approximately 65 per cent fall into the alternative space and 35 per cent long-only. Augustus Asset Managers acts as adviser to the majority of Julius Baer absolute return bond funds, all Julius Baer single-strategy fixed income hedge funds, the Julius Baer Local Emerging Bond Fund and a number of mandates.

The backdrop to the Julius Baer Absolute Return Bond Fund is the aim to make the capabilities of Augustus Asset Managers' single-strategy fixed income hedge funds available to a broader UCITS investor universe.

The Absolute Return Bond Fund was launched on April 30, 2004. The fund invests globally across fixed income and currency markets and targets an annual gross excess return of 2 to 3 per cent above three-month Euribor across market cycles, subject to a value at risk limit of 6 per cent per annum. Assets under management currently amount to the equivalent of EUR3bn. The co-fund managers are Tim Haywood and Daniel Sheard.

Following the success of the Absolute Return Bond Fund and in response to investor demand, Julius Baer subsequently extended its portfolio of absolute return bond funds with launch of the Julius Baer Absolute Return Bond Fund Plus on May 31, 2006, the Julius Baer Absolute Return Emerging Bond Fund on December 31, 2007, and the Julius Baer Absolute Return Bond Fund Defender on July 31, 2008. The Absolute Return Bond Fund Plus and Absolute Return Bond Fund Defender are also managed by Augustus Asset Managers.

HW: Who are your key service providers?

RG: The fund's investment advisor is Bank Julius Bär in Zurich, with Augustus Asset Managers as sub-advisor. The administrator and custodian is RBC Dexia Investor Services Bank in Luxembourg.

HW: How and where do you distribute the funds? What is the profile of your current and targeted client base?

RG: The funds are distributed globally, with a principal focus on European distribution channels. The main client base is in the institutional and fund of funds space.

HW: What is your investment process?

RG: The investment process is driven by alpha dimensions. Augustus Asset Managers is an active manager using a top-down, fundamentally-driven investment approach based on in-house analysis and third-party research. We seek alpha-generating opportunities to add value in six areas: G13 rates and currencies; emerging markets rates, credit and currencies; investment grade credit; high-yield credit; convertibles; and structured credit.

This holistic approach ensures that we are not overly reliant on one source of alpha generation and that no one single unforeseen market event will have an overwhelmingly detrimental effect upon any one portfolio. In other words, we aim for "more risks, but not more risk".

Within the investment process, the co-lead portfolio managers co-operate with other sector specialists and portfolio managers to identify and exploit the most attractive opportunities in the fixed income and currency markets. The formal asset allocation is defined in the weekly investment meeting. Subject to approval, investments ideas are implemented and individually monitored by the sector specialists and portfolio managers.

The flexible boutique style set-up of Augustus Asset Managers also allows promising investment ideas to be implemented between weekly investment meetings, offering an additional edge over more rigid investment processes at other houses.

HW: How do you generate ideas for your funds?

RG: Ideas are generated top-down by the co-lead portfolio managers, and populated bottom-up by the sector specialists and portfolio managers.

HW: What is your approach to managing risk?

RG: The fund's risk budget is managed at the portfolio level rather than at the sub-strategy level, allowing risk to be allocated toward the most promising investment themes. In our view, this approach provides a competitive advantage over more rigid approaches.

HW: How has your recent performance compared with your expectations and track record?

RG: The euro-denominated retail share class of the fund is up 3.8 per cent over the past three months, 6.6 per cent over the past six months, 12.12 per cent over three years and nearly 20 per cent since launch. Across all these time horizons, three-month Euribor was clearly beaten, while keeping volatility in the target range of 2 to 3 per cent per annum.

Given the sheer magnitude of pricing dislocations across markets and strategy dimensions, we expect performance to remain strong for an extended period of time.

HW: Are investors' expectations moving towards capital preservation? If so, how do you deal with this?

RG: Post-Lehman, much of the capital preservation or flight to quality and to liquidity trade is done. Our indications are that clients are increasingly willing to add risk again cautiously, be it for yield or optimisation. However, liquidity and transparency has clearly moved up the priority list in the alternative space, with investors increasingly switching into UCITS investment vehicles.

HW: What differentiates you from other managers in your sector?

RG: We offer a product line launched on the back of a proven and tested track record in alternative fixed-income and currency strategies, and a longstanding track record of delivering very competitive positive returns across market cycles and strategies, with a low correlation to traditional asset classes and at moderate quantitative and qualitative risks.

Augustus Asset Managers has a well-established record of delivering excess returns over three-month Euribor, money funds, short-term investments and absolute return bond fund peers across market cycles, with a broad-based returns profile across interest rate, credit, currencies and equity-linked strategies and markets generated within the framework of an innovative product design.

The firm is a flexible boutique set-up backed by an exceptionally stable investment team, philosophy, style and process, offering easy accessibility, market-leading reporting and transparency, and multi-layered, sophisticated risk management.

HW: Do you foresee problems in raising mandates from investors through 2009?

RG: No, we have again seen very solid NNM flows into the product line so far this year.


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