Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
The Ardea Global Alpha Strategy targets consistent, low volatility returns that are independent of market direction. Ardea's highly differentiated pure ‘relative value' (RV) investing approach offers a compelling alternative to conventional fixed income investments because it is independent of the prevailing interest rate environment and unaffected by how bond markets are performing. By accessing a large and persistent fixed income opportunity set, Ardea's pure RV investing approach delivers consistent returns, irrespective of whether bond yields are high or low and regardless of whether interest rates are rising or falling. This approach is not driven by the typical macroeconomic factors that dominate the performance of most fixed income investments, which is why it delivers alpha that is minimally correlated to bond and equity markets.
Ardea's RV approach involves identifying securities, government bonds, that are mispriced relative to other closely related securities with similar risk characteristics. These mispriced securities have potential for their prices to rise or fall independently of broader market direction. Profits can then be monetised when the mispricing corrects.
The investment team is comprised of five portfolio managers with an average of +22 years global fixed income experience and has experienced very low turnover. The investment team is supported by a research team of three as well as nine other support personnel covering risk, operations, compliance and implementation. The team currently manage a total of £12 billion.
How are you positioning your portfolio to prepare for the global recovery from the Covid-19 pandemic?
Generating sufficient returns in today's low and negative interest rate environment is a complex and growing challenge. Given recent market volatility, it is likely this uncertain environment will continue to affect fixed income markets for the foreseeable future. Conventional fixed income investing is largely based on harvesting yield; however, it is increasingly obvious that investors are having to take more duration risk for less yield or more credit risk for less return.
Ardea constructs portfolios with a large and diverse range of relative value ‘risk on' positions combined with ‘risk off' strategies that are specifically designed to profit in adverse environments. Their strategy prioritises volatility control and capital preservation over chasing returns. Ardea's RV approach is therefore particularly compelling in the current environment, where conventional fixed income return sources are challenged and where simply holding bonds is no longer an optimal defensive strategy.
Ardea's investment process targets the largest and most liquid segments of global government bond markets. The team has delivered consistent volatility-controlled returns to clients throughout different economic cycles and varying financial market environments, including periods of severe market stress such as the Covid pandemic.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Many investors have expressed concerns about the future of fixed income markets in a world of extreme monetary policy. Some common concerns are that all bond markets are turning Japanese or that government bonds are now "return-free risk". Japan or not, global bond markets now have a reduced yield buffer, which limits the capacity for duration-only strategies to protect multi-asset portfolios. However Ardea believe that the significant returns on offer from relative value trading strategies in the rates markets will persist, as there are signs that the new regime in rates markets will result in more, rather than less, relative value opportunities. For example, the surge in government bond supply coincides with record low bond yields and divergent approaches to implementing extraordinary monetary policy. This combination of extremes is changing the dynamics of fixed income markets and is creating supply/demand imbalances. Some implications could be:
- Divergent yield curve shapes across G10 markets;
- Rising new issuance yield premiums in sovereign markets;
- Central banks suppressing some sectors of yield curves, but not other sectors - even the Japanese curve still exhibits significant positive slope;
- Swap spread curves distorted by changing bond supply/demand dynamics;
- Changing distribution of inflation risk premia across curves;
- Tightening money market funding spreads.
- Long-term inflation expectations, on the other hand, look moderate in the long term; 30-year inflation expectations are lower than two year.
