Bonds, an instrument for diversifying a portfolio

Bonds represent a medium to long-term financial investment with a potential upside and a medium risk. Primarily issued by governments and corporations, they consist of units of debt in which the investor has a claim and is remunerated in the form of interest payments, which are typically fixed, known as coupons. Upon maturity, the issuer repays the investor the nominal value of the security.

A bond must be looked at not only from the perspective of its return but also in terms of issuer risk and the risk of changes in interest rates.

Pascal Gilbert, Bond Manager

A broad universe of instruments

Typically viewed as less risky than equities, bonds offer steady returns but are sensitive to changes in interest rates.

Government bonds are debt instruments issued by a State to fund its spending. They incorporate interest payments known as coupons in return for the investor advancing funds. Upon issue, the bonds specify the amount of the loan, the interest rate, the frequency at which the issuer will pay interest and the date on which it will repay the amount of the principal (maturity).

For example, in France “OATs”, in Germany “Bunds”, in the United Kingdom “Gilts” and the United States “Treasury Bonds”. These securities offer investors a strong rating, namely a solid guarantee that it will be repaid upon maturity.

“Corporate” bonds are bonds that are issued by a private company. The strength of the rating depends on the financial health of the issuer. In general, they offer more attractive interest rates than Government bonds, due to the higher risk involved.

Convertible bonds make it possible to profit from rising equity prices while controlling volatility. The equity component is the main driver of returns in this asset class during bull markets thanks to the higher price of the right to convert. The bond floor offers them protection during downturns.

Inflation-linked bonds have a principal and an interest rate indexed to inflation. The interest rate is typically lower than fixed rate bonds with the same maturity. The coupon is adjusted so that its value remains the same over time as intended upon issue. They allow investors to protect their purchasing power and investment from inflation. They work in a similar way to portfolio insurance

Even if viewed as being safe, investing in bonds carries risks including issuer default risk, liquidity risk, interest rate risk, exchange rate risk and inflation risk.

Returns should not therefore obscure these risks and that is why the selection of high quality issuers on one hand, and active and flexible management of sensitivity and duration on the other, represent cornerstones of our fixed income management.

We thus seek to anticipate changes in macroeconomic conditions and monetary policy to seize opportunities and reduce the risks to our portfolios.

Our convictions are based on in-depth knowledge of issuers and ongoing risk anticipation

Philippe Champigneulle, Bond Manager