Aquila Capital has launched the AC – Risk Parity Bond Fund, the world’s first risk parity strategy to focus solely on fixed income. The new strategy is seen as a solution for investors who wish to retain substantial exposure to fixed income despite any challenges that may face the asset class.
The importance of this issue is underlined by a new research study conducted by Aquila that reveals nearly two out of three European institutional investors (66 per cent) describe current market conditions for fixed income investors as either challenging or very challenging. Nearly three out of five (59 per cent) say it is difficult to generate positive performance throughout the interest rate cycle, including 15 per cent who say it is very difficult.
The fund’s objective is to offer investors long term stable returns regardless of the twists and turns in the economic and fixed income cycle. It targets a return of cash plus three per cent with annualised volatility of approximately three per cent.
The fund applies a systematic allocation method that does not rely on forecasts or duration targeting, while being as diversified as possible across instruments, return drivers, geographies and durations. It does this through investing with equal risk weightings across four uncorrelated types of fixed income asset. These are government bonds, corporate bonds, carry positions in emerging markets and inflation-linked bonds. These assets also have varying correlations with the economic and fixed income cycles. As such, this combination allows positive long term return targets regardless of whether rates are rising, falling or flat.
Despite institutional investors’ concerns regarding fixed income, the Aquila research shows that exposure to fixed income is unlikely to change much over the next three years: 31 per cent say their allocation will remain the same; 29 per cent say it will increase moderately, while 27 per cent say it will decrease moderately. Only four per cent anticipate a dramatic reduction.
Less than one in five investors (19 per cent) agree that a “great rotation” of investor capital from bonds to equities is taking place, with the majority (54 per cent) rejecting the concept outright and 27 per cent uncertain.
Torsten von Bartenwerffer, senior portfolio manager at Aquila Capital, says: “The AC Risk Parity Bond Fund is designed to offer investors long-term stable returns irrespective of market conditions and we believe this will strongly appeal to a broad range of long term conservative investors. Capital is allocated based on the risk an asset contributes to the portfolio rather than predicted returns and market timing plays no role at all. Instead, the strategy focuses on managing uncertainty through effective diversification between assets that have no correlation to each other and which have various correlations to different phases of the economic and fixed income cycles. Sub asset classes are selected such that as one goes down, one or more of the others will rise.”
Stuart MacDonald, managing director at Aquila Capital, says: “By regulation or desire, many investors will remain exposed to fixed income, but many of them are making little or no return and as our research shows, are concerned about possible interest rate rises. At a time when the outlook for fixed income is uncertain, our strategy offers fixed income investors a truly diversified and liquid counterbalance to their existing exposures, which may be perceived as vulnerable should fixed income markets reverse. Our research shows that risk parity is likely to feature in a growing number of portfolios and we believe that investors will welcome the opportunity to benefit from this strategy in the fixed income space.”
The fund, which is set up as a Luxemburg-based UCITS (SICAV) has a minimum investment of EUR50,000. It applies the same risk parity allocation principles as Aquila Capital’s multi-asset AC Risk Parity strategy (including the AC Risk Parity 7, 12 and 17 funds).