“Convertible Strategies support regular Fixed Income Portfolios“

The remaining high concentration of fixed income assets in institutional portfolios requires creativity in the adaption of the asset allocation to the ongoing low yield environment. This potential reallocation may support convertible bonds, which are combining positive elements of both fixed income and equity instruments. The bond holder has the right to convert into a specific amount of shares of the underlying equity of the issuer. Generali Investments manages more than Euro 960 million of convertible instruments. Portfolio Manager Brice Perin is in charge of these positions. He met altii to explain his views, his management approaches and what drives him.

About Brice Perin
Since December 2013 Brice Perin has been responsible for convertible bond investments within the absolute return portfolios and for all Convertible Bond funds at Generali Investments. Prior to that, he was responsible for Volatility Funds in Acropole AM. From 2007 to 2011, he was responsible of Convertible and Volatility Arbitrage Funds within the Convertible Bond / Absolute Return Teams at la Française AM. From 1999 to 2007, he was Head of Convertible and Volatility Arbitrage at DWS Investments. Brice graduated from ENSAE Paris Tech (School of Economics, Statistics and Finance) and has an industry experience of 16 years.

altii: Mr Perin please explain the basics of the convertible investments you are managing. For whom are they beneficial?

Brice Perin: Convertible Bonds carry a multi-asset class profile of fixed income instruments with an underlying equity component. Therefore Convertible Bonds, carry an attractive asymmetry in terms of equity-like returns, downside protection and limited volatility. The asset class benefits from a self-adjusting, risk-adjusted return profile.

Horizon Market Value (€ bln) Number of Securities
2015 (until November 2nd) 297.9 772
2014 294.3

821

2013 282.7 860

Table 1: Global Convertible Bond Market. Source: Barclays Bank

The convertible market has developed consequently in the past years (Table 1). The global market value is now approx. 300 billion, and already at year-end values from the years before. The aforementioned convexity is extremely appealing in a context of market uncertainty, market volatility, and low interest rates.

altii: What is the size of your portfolio and how is it structured?

Perin: As of today we are managing more than Euro 960 million in Convertible Bonds. Of which Euro 400 mm via dedicated mandates for the Generali Group while the remaining 500+ million are split in open-ended UCITS funds invested in outright and absolute return convertible strategies. More specifically, investors who look into our absolute return convertible bond strategy usually seek constant returns across the market cycle within a regulatory vehicle that is UCITS compliant. The investors therefore benefit from a highly professional alternative investment solution. We have placed fundamental analysis (credit and liquidity) at the very beginning of our investment process backed by an 18-strong in-house credit research team, 13-strong macro research team and a dedicated equity research team.

Investment Grade 24%
High Yield 29%
Not Rated 47%

Table 2: Global market rating breakdown. Source: Barclays Bank

As a matter of fact, almost half of the convertible bonds issued on the markets are not rated (Table 2) which again highlights the importance of our in-house credit research team and in-house credit rating. This also enables us to consider opportunities that otherwise would not be possible.

altii: Are institutional investors allowed to invest and how is the treatment under Solvency II?

Perin: Our UCITS compliant open-ended funds are available for both institutional and retail investors. The daily liquidity adds more flexibility and facilitates funds’ subscriptions. Another advantage of such instrument is its cost relating to Solvency Capital Requirements, within the Solvency II regulatory framework. Convertible bonds stand for a lower regulatory cost versus equities, while offering similar returns making such investments very appealing.
As a result, the asset class sees growing attractiveness among institutional investors and increasing inflows. In parallel, the primary market has been very dynamic both in terms of volume of new issues and the number of issuers. This activity has led to a better diversified sector and country distribution.

altii: What differentiates your strategy technically from others?

Perin: As previously discussed, convertible bonds are a multi-component asset class, combining various features - equities, bonds, credit, implied volatility, and prospectus clause. These alpha drivers often move in different directions and benefit from different market cycles. Consequently, depending on the momentum, some would generate positive performance while others would “destroy” alpha.
That is why we launched our GIS Absolute Return Convertible Bonds fund with the ability to hedge the unwanted parameters and therefore optimize the alpha drivers. Combining a long only strategy with hedging/arbitrage techniques allows investors to isolate and exploit various strategies. In our view and in the context of the current market conditions it is extremely important to have a certain degree of flexibility.
Lastly, an absolute return investment approach applied to convertible bonds fund allow us to add arbitrage techniques only used by some hedge funds, in a transparent, rigorous and risk-managed UCITS structure.

altii: The market has size but who are the issuers of convertible bonds? Is the market diversified?

Perin: By today the range of sectors is more diversified than it used to be in the past (Table 3). The banking system is currently underweighted and the real estate sector has a tendency to be over weighted. In terms of notionals, the range is wide going from small caps to very large caps with jumbo deals up to 2 billion and with names like Airbus and Telecom Italia. Within the current market conditions issuers can enter the market with a very low or a zero coupon and sometimes even with negative yields (true for certain investment grade names). Having said that, we estimate that the market is large enough, allowing us to be selective in our security picking. In addition, our absolute mandate approach gives us the opportunity to hedge parameters in order to focus on the ones we would like to isolate.

Information Technology 24%
Financials 20%
Healthcare 13%
Consumer Discretionary 13%
Industrials 9%
Energy 7%
Others 16%

Table 3: Global market sector breakdown. Source: Barclays Bank

altii: What happens to a convertible bond if the issuer is taken over in a mergers and acquisition (M&A)?

Perin: Most issuances include a prospectus clause called the ratchet mechanism. In the event of an M&A situation the investor would lose the value of the optionality at one moment. The ratchet mechanism compensates the premium paid at issuance and could be a potential alpha source in case of a takeover. The attractiveness of these clauses depends on the level of delta/ underlying equity, the residual maturity and the implied credit spread.

altii: Is your fund actually limited to the UCITS vehicle?

Perin: The UCITS framework was chosen since most investors are comfortable with and already using such regulatory standard. We are nevertheless flexible to offer investors other vehicles, e.g. Spezialfonds or managed account solutions. Of course the legal structure should be chosen in a way that the requirements of the investors are fulfilled and that our trading purposes are matched. Given the fact that our approach is straight forward solving this equation should be simple.

altii: Thank you.

About Generali Investments:
Generali Investments, the main Generali Group asset manager, offers a broad choice of personalised investment solutions for institutional and private clients, ranging from institutional mandates to mutual funds.
With approximately €375 billion of assets under management as of end of June 2015, Generali Investments is one of the largest asset managers in Europe. The company has developed proven expertise in multi-asset portfolio management, adopting a method based on research and a prudent risk approach to protect invested capital and deliver stable long-term yields.

Covering ESG issues is increasingly important for institutional investors

Since 2006 the Generali group is giving the topic “sustainable developments” careful consideration. A dedicated team of professional analysts from Generali Investments Europe is developing its self-created ethical filter that comes into deployment in the investment process. alternative investor information asked Franca Perin and Murielle Villemin for background information.

altii: Why should institutional investors pay more attention to social responsible investments (SRI) at all?

Franca Perin: Most ‘mainstream’ fund managers do not research environmental, social and governance (ESG) issues in detail. As a result they can miss possible investment opportunities – or risks for the companies they invest in. This is particularly true for longer-term issues, but can also be related to the shorter term.
Companies that manage ESG issues well relatively to their peers will increasingly gain advantages, as they will be able to spot related business opportunities (and risks) ahead of their peers.
Murielle Villemin: Covering ESG issues is more and more important for both investee companies and institutional investors because regulation and legislation are driving the standards higher. The investment communities are therefore developing increasing interest in the demand for products and services.
Funds that invest in environmental solution driven companies are investing early into companies that may enjoy significant future growth.
Perin: At least: Companies that manage their use of natural resources well – including the cost of carbon emissions – can save money and generate higher profits for distribution to investors. A strong management of ESG issues is often regarded as an indicator of good overall company management in addition.

 altii: There is a straightforward presumption almost a myth that investments done under SRI principles are archiving less return than conventional investments. Is that really true and what is your experience?
Villemin: Socially responsible business is less likely to encounter regulatory penalties or harmful portrayals in the media. This mitigated risk will ideally be passed along to investors through higher returns. Our SRI funds have outperformed their benchmarks since inception and during the most volatile times. It is our belief that socially responsible companies create value for all stakeholders, not just shareholders.

altii: Investing under SRI principles has a wide universe of definitions and different understandings. How is Generali defining such investments in respect to SRI principals?
Franca Perin: For the selection of socially responsible investments, a proprietary methodology based on a best-effort approach has been developed. For each company analyzed, this methodology provides:
- An analysis of 34 ESG criteria, reviewed and updated annually, with the allocation of scores;
- The mapping of non-financial risks like reputational risk, class action, legislative pressure or carbon footprint that may have an impact on the price of company shares and the way in which they are regarded by corporate policies;
- The integration of financial criterias for the final selection of the companies identified.
- A team of five analysts, supported by a scientific committee, then selects the best companies with regard to corporate social responsibility and sustainable development policies, also by means of a process of dialogue aimed at improving the performance of the companies considered, as appropriate.
- This approach led to the creation of an internal database, called S.A.R.A. (Sustainability Analysis of Responsible Asset), through which dedicated funds have been established, including the fund under Luxembourg law - Generali Investments SICAV European SRI Equity.

altii: Some market players think SRI is the same like “green” investments. This is of course not the case. How does Generali draw the borderline?
Perin: Our funds are SRI because they take into account all the 3 ESG criteria and not only the environmental aspects.

altii: Generali Investments Europe developed an ethical filter that is called into action by considering the investment process. Please explain us briefly what you are taking into consideration and how does it work in reality.
Villemin: The Group has been implementing an ethical filter to its global investments since 2006, eschewing instruments of companies that violate human rights, directly or indirectly contribute to killing, torture, deprivation of freedom, or have a severely harmful impact on the environment or the production or sell of weapons. It is based on our ethical guidelines and exclusion list. By that filter we exclude 32 companies for all our direct funds.

altii: How many companies can you consider for investments after deploying this filter?
Villemin: We cover 460 large caps in the European universe. After deploying the filter, around 230 companies are integrated in our SRI buy-list. 

altii: How do you use your influence over selected companies? Are you actively using your power of influence and voice?
Perin: The SRI department is in charge of the proxy voting for all the assets, which supports our focus on engagement and corporate governance. We aim to ensure as a major shareholder that we are also acting as an active stakeholder in the companies that we hold. In this regard, we are one of the asset managers that opposes the most frequently to resolutions.

altii: What is happening when companies are breaching ESG rules after the filter is positively used and Generali already placed investments?
Perin: We write an alert that we send internally to the portfolio managers and, depending on the seriousness of the breach and its potential financial and reputational impact, we put the company under supervision or decide to exclude it from our SRI buy-list.

altii: How often are you checking and controlling your investments?
Perin: For the companies under coverage we check continuously according to public information and controversies. For the invested SRI funds we monitor performance through a monthly and quarterly reporting that include financial and non-financial data.

altii: As the general basis of the Generali approach you mentioned your own developed database S.A.R.A. Please explain us the principals.
Villemin: Through the platform S.A.R.A., the SRI research team helps our managers to integrate ESG issues and risks in the investment process.
To do so we use a risk scoring matrix to determine the most relevant issues of each sector:
- Damage to the image and reputation
- Legislative pressure to regulate the activities of the company
- Class action (direct and indirect costs)
- Immaterial Capital (long-lasting value of intangible capital)
- Carbon impact (trading price)
In each activity sector, the 34 criteria are variously pondered to take account of all underlying risks. This makes it possible to select the companies with the best practices in relation to the specific characteristics of their particular business.
Then, all the relevant information collected from public sources and company meetings are integrated in the database to explain the ratings and scorings assigned to each company under SRI coverage.

altii: Why is Generali spending the resources and developing an own build database? You could use Sustainalytics as an example.
Villemin: We have rather specific needs, so we use our own proprietary ESG database. Our Database allows the traceability of all ESG ratings and quantitative and qualitative data.
Our in-house database allows us to examine and integrate into our investment decisions a series of non-financial variables. Over the long term this information can have an impact on the economic and financial performance of our assets. Our in-house ESG research is a differentiation factor in the insurance industry.

altii: Right now Generali has approx. Eur 6 bln assets under management in SRI related assets selected by the described investment philosophy. Compared to the overall managed assets of Generali in the size of Eur 290 bln this seems to be just a smaller portion. Is this view correct and why is SRI such an important topic for the investment behavior of the near future?
Perin: It is our objective to convert more funds in the future under SRI principles.

 

Im Interview

Franca Perin
Leiterin SRI Research, kam 2010 als Leiterin des SRI Analysts Team zu Generali Investments Europe inParis. Sie definierte den ESG-Ansatz und entwickelte eine Rating-Datenbank für Mandate im GISEuropean SRI Equity Fund. Davor leitete sie das SRI Research & Analysis bei Dexia A.M. und Core Ratings, Fitch Group. Sie begann ihre Karriere 1999 als Projektmanager RSE in der NGO Friend of the Earth. Perin ist seit 2009 Partner-Professor im Bereich Umweltmanagement an den Universitäten Sète undVersailles.

MurielleVillemin
ist seit 2003 Equity Fund Manager bei Generali Investments Europe. Sie begann 1995 bei der Axa Finance Division als Finanzanalystin.

 

Generali Investments Europe (GIE)
ist mit einem verwalteten Vermögen von mehr als 320 Mrd. Euro einer der führenden Asset Manager in Europa. Das Unternehmen, das zu 100% von der Generali Gruppe kontrolliert wird, verwaltet Vermögenswerte Dritter und der Gruppe und greift dabei auf die Expertise von mehr als 100 Experten zurück.

Zusätzlich zu traditionellen Aktien- und Rentenstrategien, Multi-Asset-Portfolios und Dachfonds baut Generali Investments Europe auf seine ausgewiesene Expertise und Möglichkeiten, die bei der Verwaltung der Vermögenswerte der Gruppe zum Einsatz kommen, um den bewährten flexiblen Absolute-Return-Ansatz und die Asset-Liability-Strategie zu entwickeln. 
Gleichzeitig verfügt das Unternehmen über eine eigene Screening-Methode für Socially Responsible Investments (SRI). Generali Investments Europe zeichnet sich durch seinen disziplinierten und umsichtigen Ansatz basierend auf konsequentem Risikomanagement und eigenem Research aus. Ziel sind langfristig konstante Renditen mit geringer Volatilität und Schutz des investierten Kapitals.