Concentration in Convertible Bond Funds

The dataset comprises the approx. 78 funds from the Global Convertible bond Funds EUR-hedged Morningstar’s category:

• Mean: These monies typically have 138 instruments, the FTSE Global Focus EUR-hedged currently holds 237 bonds.
• Standard Deviation: Reflecting different management techniques, a standard deviation of 93 indicates a great range in the number of holds.
• Range: The greatest and least diverse funds are clearly shown by the minimum of 30 to maximum of 554 number of holdings.

The 25th percentile is 78 holdings, the median is 116, and the 75th percentile is 165 holdings, therefore showing the range of holdings over the funds.

Source: B&G, Morningstar, Newsletter and Annual reports 

One of the most striking observations from this data is the wide range of fund holdings, from as few as 30 to over 550. This range underscores the different approaches fund managers take to portfolio construction.

At one end of the spectrum, we have funds with 554 holdings, showcasing a broad diversification strategy aimed at risk mitigation and stable returns. Such funds are designed to minimize idiosyncratic risk by spreading investments across a large number of instruments.

Boussard & Gavaudan Convertible Fund Case Study

On the other hand, our fund, the Boussard & Gavaudan Convertible, with only 38 holdings, highlight a more concentrated approach. This fund, ranking among those with the fewest holdings, reflects a high-conviction strategy. Such concentration indicates an active management style where the fund managers invest in a select number of instruments they believe will outperform. This strategy is often seen in funds that aim to capitalize on specific opportunities and generate higher returns, albeit with potentially higher risk.

 

Active Management and Conviction

The concentrated nature of the Boussard & Gavaudan Convertible Fund exemplifies an active management approach driven by strong convictions. Fund managers in such setups conduct thorough research and rely on their expertise to select a limited number of high-potential investments. This approach can lead to significant outperformance if their insights prove correct, but it also exposes the fund to higher volatility and risk if the selected investments do not perform as expected.

While being a very concentrated portfolio, the Boussard & Gavaudan Convertible fund exhibits a really interesting characteristic. When comparing its tracking error to several competitors, it looks that the fund keeps successfully a low tracking error to the FTSE Global Focus EUR-hedged.

 

Understanding Tracking Error

Tracking error is a statistical measure of the divergence between the price behaviour of a fund and its benchmark. It is expressed as a percentage and provides insight into the fund's consistency in mirroring the benchmark's performance. A lower tracking error indicates that the fund is closely following the benchmark, while a higher tracking error suggests greater deviations.

 

The Graph: Tracking Error Over Time

Source: B&G, LSEG and Bloomberg. The line in dark blue is Boussard & Gavaudan SICAV Convertible I EUR fund. Past performance is not a reliable indicator of future performance and your capital is at risk

The provided graph illustrates the 1-year daily tracking error of various funds within the Morningstar Global Convertible Bond Funds EUR-hedged category against the FTSE Global Focus EUR-hedged index from April 2017 to April 2024. Here are some key observations:

1. Initial Stability:
• From April 2017 to early 2020, the tracking error for most funds remained relatively low and stable, fluctuating around 0.20% to 0.40%. This period indicates a phase of consistent performance with minimal deviation from the benchmark.
2. Impact of Market Turbulence:
• Around early 2020, there is a notable spike in tracking error across multiple funds, reaching peaks between 1.20% and 1.80%. This increase coincides with the global financial market turbulence caused by the COVID-19 pandemic. The heightened tracking error reflects the increased difficulty in maintaining alignment with the benchmark during periods of extreme market volatility.
3. Gradual Recovery:
• Post-2020, the tracking error begins to decrease gradually. However, it remains higher than the pre-2020 levels, indicating a recovery phase where funds are still adjusting to the new market conditions.
4. Recent Stability:
• From late 2022 onwards, the tracking error stabilizes again, although not as low as in the initial period. This suggests that while the funds have regained some consistency, the market dynamics have altered the baseline performance metrics.

 

Highlight: Boussard & Gavaudan Convertible Fund

Despite being one of the most concentrated funds, the Boussard & Gavaudan Convertible fund stands out with one of the smallest tracking errors. Concentrated funds typically invest in a smaller number of holdings, reflecting strong convictions in selected investments. This approach can lead to higher risk and potential volatility, yet Boussard & Gavaudan has managed to maintain a remarkably low tracking error.

Key Factors for Low Tracking Error:

1. Active Management:
• The fund's management team likely employs rigorous research and active management strategies to ensure that each holding aligns closely with the benchmark's performance. This active approach helps in minimizing deviations and maintaining a low tracking error.
2. High Conviction:
• With fewer holdings, the fund can focus more intensively on each investment, ensuring that they collectively mimic the benchmark's movements closely. This high-conviction strategy appears to pay off in terms of tracking accuracy.
3. Risk Management:
• Effective risk management practices are crucial. By carefully selecting instruments and continuously monitoring their performance relative to the benchmark, the fund can adjust its portfolio as needed to maintain alignment.

The analysis of the 1-year daily tracking error for the Morningstar Global Convertible Bond Funds EUR-hedged category highlights the dynamic nature of fund management and market conditions. The period of increased tracking error during the COVID-19 pandemic underscores the challenges faced by funds in volatile markets.

The Boussard & Gavaudan Convertible fund's ability to maintain a low tracking error despite its concentrated holdings is particularly noteworthy. It demonstrates that with active management, high conviction, and robust risk management, a fund can achieve performance closely aligned with its benchmark, even with a focused portfolio.

Investors looking for funds that balance the potential for higher returns with consistency in performance may find such funds appealing, as they offer a strategic approach to navigating both stable and turbulent market conditions.

 

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DISCLAIMER

The views and opinions expressed are for informational and educational purposes only, as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example.

Past performance is no guarantee of future results. Investing involves risk; loss of principle is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Nothing on this communication shall be considered a solicitation to buy or an offer to sell a security, or any other product or service, to any person in any jurisdiction where such solicitation, offer, purchase or sale would be unlawful under the laws of that jurisdiction.

This communication has been issued by Boussard & Gavaudan which is composed of the following entities:
Boussard & Gavaudan Investment Management LLP (“BGIM”) is a limited liability partnership registered in England and Wales, authorised and regulated in the U.K. by the Financial Conduct Authority (“FCA”) and registered as an investment adviser with the US Securities & Exchange Commission (“SEC”). BGIM is also registered with the US Commodity Futures Trading Commission (“CFTC”) and the US National Futures Association (“NFA”) as a Commodity Pool Operator and Commodity Trading Advisor. Boussard & Gavaudan Gestion SAS (“BGG”) is registered in France as a ‘Société par actions simplifiée’ which is authorised and regulated in France by the Autorité des Marchés Financiers (“AMF”). Boussard Gavaudan America LLC (“BGA”)  is incorporated in Delaware and is registered with the SEC. The Boussard & Gavaudan Convertible Fund is actively managed (the management team has discretion over the composition of its portfolio) and is not managed in reference to any benchmark index. The Fund is available to Professional Investors only.