FRANCE – Institutional investors with sizeable bonds portfolio should consider unconstrained mandates, according to Vincent Puche, head of Hewitt Associates’ Parisian practice.
“It makes sense especially when interest rates are very low and the objective is much more an interest-rate return in the future rather than a benchmark,” Puche told IPE.
The senior consultant said that active management of bonds can add value, but only if before taking this step, pension funds make a thorough selection of managers.
Liabilities must be carefully considered, he said, adding: “Not everyone can handle freedom, a few can.”
Puche also observed that unconstrained mandates can give freedom on duration and on the yield curve.
The consultant cited as an example the pension fund for notaries or Caisse de Retraite des Notaires, CRN, which in 2003 awarded three unconstrained bond mandates to tackle low returns and interest rate risks.
The €1bn fund, which invests in bonds, equities and real estate, chose Credit Agricole Asset Management, Ixis Asset Management as well as BNP Paribas Asset Management to manage bond briefs worth €100m each.
Hewitt helped the fund in both the decision to try unconstrained management for the bond portfolio and in the asset management selection.
“The client has different active managers for its equity portfolios and the idea was to do the same thing with bonds. It was all about freeing asset managers and no longer ask for tracking error,” he told IPE.
Hewitt has monitored the managers’ performance on a monthly basis since 2003 and on average the three managers beat the market’s benchmark independently of interest rates movement, Puche said.
“What was interesting is that they delivered good performance when the interest rates went up and when they went down. There definitely was very active management,” Puche observed.
In 2003 the managers’ average performance amounted to 4.35% compared with JPM EMU +3.98%, in 2004 +7.76% versus the benchmark’s +7.74. In January 2005, the managers under-performed the benchmark with a +1.16% performance versus JMP EMU‘s1.19%. In February it totalled 0.47% compared with the index’s –0.61%.