Identify key economic or market trends and inflection points
Talking Factsheet
Sovereign Debt Strategy
Vikram Aggarwal gives an overview of Jupiter’s sovereign debt strategy, how the investment process works, and how the team seek to generate alpha.
The strategy aims to deliver superior returns from a portfolio of global sovereign bonds, with a similar degree of realised volatility to a passive allocation. Our approach is to start with an allocation to develop market sovereign bonds and then to diversify into emerging markets, as well as risk allocations to spread and FX investments. Our aim is to fulfill the traditional role of sovereign bonds within a multi-asset portfolio, in particular by delivering a negligible correlation with equities and other risky assets.
We start by formulating a top down global macro economic outlook, and this is critical in framing the duration risk, the overall sovereign spread risk and FX risk that we want to take in the portfolio. We look at fundamentals and policies. But ultimately we are trying to identify which macro regime we believe the world or the global economy is in. We then compare that to the macro regime, which has the highest probability assigned to it by market pricing and also to investor positioning. When the divergence between those three is at the greatest. That then drives a higher conviction in terms of risk allocation and also more investment opportunities. The top down global macroeconomic outlook dictates where we look in terms of individual countries, but we also focus on outliers.
So we focus on outliers by trailing performance and valuation. And then in terms of opportunity selection this is segmented into three types. The first type is macro. Macro opportunities fit the global macro economic outlook, but also where our view on the in-country macro regime differs from market pricing or investor positioning. Secondly, thematic - we seek to identify 2 to 3 different sovereign specific themes and look for opportunities as an expression of those.
And finally, the third category is event driven opportunities. These are special situations where we have identified events on the horizon which we believe can catalyze a change in valuations. In addition, we use derivatives to implement hedges and to position for tail risks, which we believe will deliver an asymmetric risk reward profile to the portfolio.
We have a multi-year track record in investing in sovereign fixed income, and in this strategy we are combining our expertise in macro fixed income allocation with in-depth individual country expertise. We have a contrarian approach to portfolio construction and opportunity selection, and we believe this helps us to deliver alpha by identifying when the market is incorrectly pricing macro or country risk.
We also tend to use leading economic indicators over coincident or lagging economic indicators. And by positioning the portfolio in advance, we are able to capture the outperformance during macro regime shifts. We also focus on geopolitical risks, and we believe this differentiates us from the peer group. Geopolitical risks and identifying these risks is a natural byproduct of our investment process. And the sovereign fixed income universe is unique because it provides investment instruments which are directly correlated to these risks. So by hedging against these risks, we believe that we deliver portfolio resilience.
Our aim when investing in sovereign fixed income is to deliver superior returns versus global sovereign bonds with a similar degree of volatility.
Why invest in Jupiter Global Sovereign Opportunities
Fulfilling the traditional role of sovereign bonds
Portfolio Diversifier
• Uncorrelated to equities
• Fulfilling the traditional role of sovereign bonds within a multi-asset portfolio
• Deliver a negligible correlation to equities and other 'risky assets'
• Use spread and FX exposures as levers to achieve risk/correlation profile
Contrarian
• Challenging consensus economic and market narratives
• Avoiding investor positioning concentrations
• Capture higher outperformance achieved during market regime shifts
• Achieve better entry levels when market is incorrectly pricing country risk
Fund Resilience
• Building an asymmetric risk-reward profile
• Implementing hedges and positioning for tal risks
• Consistent risk and scenario analysis to identify 'cheap' hedges against core portfolio view
• Position for geopolitical tail-risks through use of asymmetric trades
Unconstrained
• Truly global
• Diversifying from core PM rates into EM. spread and Fx
• Optimise asset class allocation, particularly EM. and position for key market inflexions
• Find best risk-reward sovereign opportunities in individual countries using 'country' complex approach
Where are sovereign opportunities?
Rates
- DM sovereigns
- EM local-currency sovereigns
Spread
- EM hard-currency sovereigns
- Quasi-sovereigns (DM and EM) DM sovereigns
FX
- G10
- EMFX
- Frontier
- Investment process
- Investment toolkit
Unconstrained instrument selection across “Country Complex”
Typical trades
Geopolitically-aware fund
Positioning for the New World Order
- We believe that the unipolar world order has changed to a bi- or multi-polar world order
- Sovereign fixed income universe is unique as it provides directly-correlated investment instruments to position for geopolitical events
- Identifying geopolitical (tail-)risks is a natural by-product of our investment process
- We seek to hedge against or position for these risks, which are often non-linear
- We often implement this via credit-default-swaps (CDS) – these are effectively put options on the underlying bond(s), offering asymmetric payoff structures
- Our aim is to achieve portfolio resilience
Meet the team
Jupiter Global Sovereign Opportunities Team
Fund specific risks
- Interest Rate Risk – The Fund can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates .e.g. the value of a bond tends to decrease when interest rates rise.
- Credit Risk – The issuer of a bond or a similar investment within the Fund may not pay income or repay capital to the Fund when due.
- Derivative risk – the Fund may use derivatives to generate returns and/or to reduce costs and the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.
- Emerging Markets Risk – Emerging markets are potentially associated with higher levels of political risk and lower levels of legal protection relative to developed markets. These attributes may negatively impact asset prices.
- Share Class Hedging Risk – The share class hedging process can cause the value of investments to fall due to market movements, rebalancing considerations and, in extreme circumstances, default by the counterparty providing the hedging contract.
- Contingent convertible bonds – The Fund may invest in contingent convertible bonds. These instruments may experience material losses based on certain trigger events. Specifically these triggers may result in a partial or total loss of value, or the investments may be converted into equity, both of which are likely to entail significant losses.
- Sub investment grade bonds – The fund may invest a significant portion of its assets in securities which are those rated below investment grade by a credit rating agency. They are considered to have a greater risk of loss of capital or failing to meet their income payment obligations than higher rated investment grade bonds.
- Pricing risk – Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
- Currency (FX) risk – The Fund can be exposed to different currencies and movements in foreign exchange rates can cause the value of investments to fall as well as rise.
- Counterparty Default Risk – The risk of losses due to the default of a counterparty e.g. on a derivatives contract or a custodian that is safeguarding the Fund’s assets.
- Charges from capital – Some or all of the Fund’s charges are taken from capital. Should there not be sufficient capital growth in the Fund this may cause capital erosion.
For a more detailed explanation of risk factors, please refer to the “Risk Factors” section of the Prospectus.
The fund may be subject to other risk factors, please see the Scheme Particulars for further information.
This is a marketing communication. Investors should carefully read the Key Investor Information Document (KIID), Supplementary Information Document (SID) and Scheme Particulars, particularly to the fund’s investment objective and characteristics including those related to ESG (if applicable), before making any final investment decisions. These are available from the document library.
Important information
Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the speaker at the time of recording, are not necessarily those of Jupiter and may change in the future. This is particularly true during periods of rapidly changing market circumstances.
This communication is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This communication is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the Investment Manager(s) at the time of preparation, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Issued by Jupiter Unit Trust Managers Limited (JUTM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, which is authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM.