Carmignac Portfolio Flexible Bond 5-Year anniversary

It has now been 5 years since we overhauled our fixed income flagship Fund with the integration of Guillaume Rigeade and Eliezer Ben Zimra into our investment team. Having successfully weathered various market phases (Covid, resurgent inflation, increased cost of capital, political and geopolitical stress), it's time to consider 5 key characteristics and figures of Carmignac Portfolio Flexible Bond and the fixed income markets going forward.

Carmignac Portfolio Flexible Bond is a fixed income fund investing globally across segments while systematically hedging the currency risk with the aim to satisfy its total return mandate over a 3-year investment horizon.
The Fund is a genuine delegation of the fixed income bucket of an allocation combining top-down views, to identify the most suited fixed income segments to the global environment, and bottom-up convictions, to maximize the alpha generation – with the insight of credit, emerging markets and developed markets teams.
In addition to a very large investment universe, our two portfolio managers also have access to a wide range of derivatives instruments to set up overlay strategies. Such instruments enable them to express marked directional convictions to fit with the economic cycle or to tactically neutralize or rise exposure in order to benefit from exceptional events.
Our strategy is also well positioned in terms of extra-financial criteria integration, as our Fund has been awarded the SRI label¹ by the French government and adheres to article 8 of the SFDR directive².
The portfolio managers have won several awards for the management of their Funds. They currently hold an "AA" rating from Citywire³,⁴, and their fund has a 5-star rating from the Quantalys research and analysis website.
Eliezer Ben Zimra and Guillaume Rigeade have been co-managing the Carmignac Portfolio Flexible Bond fund since July 2019. However, they have been working together as a team for more than 11 years.
Thanks to the confidence of our partners, our strategy now⁵ has €1.4 billion in assets under management. A success we deem is set to continue, as active management is crucial in a fixed income environment where dispersion is high, financing costs have soared, and economic agents are increasingly indebted while investors seek an allocation to funds with a moderate risk/return profile.

Outperformance of Carmignac Portfolio Flexible Bond compared to other major fixed income segments over the last 5 years:

Since the fund overhaul and the arrival of Guillaume Rigeade and Eliezer Ben Zimra, Carmignac Portfolio Flexible Bond has delivered a positive performance of +11.28% compared with -13.16% for its reference indicator⁶, being fully in line with its dual mandate.
Looking into the engines of such alpha generation, we can highlight that all buckets (corporate debt, financial debt, sovereign debt) have been contributing positively to the total returns of the Fund thanks to our active management of exposures during stress periods, our attention to valuations and our seasoned selection of debt issuers. This achievement must be set against the backdrop of a particularly complex environment over the past 5 years, in which we have experienced a spread shock (Covid crisis) and an interest rate shock (inflationary crisis), resulting in a negative performance of 80% of fixed income assets globally over the period.
Moreover, another great contributor that has enabled us to expertly handle the market's stressful phases was the overlay engine. Indeed, our two portfolio managers fully exploited the limits of their mandate with the modified duration having effectively evolved between -1.5 and +8, as well as the use of credit hedging strategies (which have been fully covering our high yield exposure at times) to mitigate market downturns and benefit from recovery movements.

Every market has challenges, and yet every market has its rewards. Fixed income markets have undergone a profound transformation over the past 5 years along with: the Covid-led sovereign debt boom, the inflationary shock of 2022, the renewed positive real rates and its corollary of heightened cost of capital, and even more polarized geopolitics. All of which will have lasting effects on the asset class.
The growing indebtedness of economic agents – and most notably of sovereign issuers which have been in the front line in the wake of ever rising deficits – means that developing a thorough appreciation of credit risk across corporate and sovereign issuers is indispensable and – that after years of spread convergence – it will increasingly become a source of added value.
Credit markets have also been brought back to life with real rates back in positive territories across most credit segments. And the latter means that carry strategies have been, since 2022, once more profitable. However, the counterpart of higher rates is the higher cost of capital and the recent rise in jumbo defaults highlights the difficulty for certain issuers to refinance debt books and the necessity to tell the wheat from the chaff, as well as to have robust restructuring capabilities.
This new world order has also brought back inflation, which had been obliterated for almost 2 decades now, to the forefront along with the notion of economic cycle. And beyond the absolute level of inflation going forward, price-related uncertainty commends for both a higher inflation premium and the necessity to select assets which can endure unforeseen prolonged periods of higher rates.
Looking at the glass half empty, the above could raise an eyebrow or two, but looking at the glass half full, this environment offers relatively attractive yields and in the fixed income world the level of yield is rather a reliable indicator of future returns provided one has the adequate capabilities in bond picking and to appreciate the complexities of the world we navigate.

Evolution of the indebtedness of US economic agents (Bn USD in nominal terms)

Once again, this year, our positioning generates value in a particularly challenging market environment. We have adapted our portfolio to a stickier-than-expected inflation regime, increased pressure on long-term interest rates, and a deteriorating political and geopolitical environment.
Our Fund currently relies on three different performance drivers:

• Carry play through an in-depth selection of the most attractive issuers in the credit universe, in the high yield, hybrid corporate, subordinated financial debt and structured credit segments. Nevertheless, we are tactically managing net credit exposure in a market that is attractive in terms of yields but on the back of richly valued spread assets.
• Neutral modified duration exposure (three times less than its reference indicator⁶) with marked conviction for a steepening of yield curves as the economic slowdown should be mild and deficits aren’t expected to be tackled any time soon.
• High exposure to inflation-linked instruments while we believe market is too optimistic regarding the forecast of disinflation trend for the months to come.

Such a positioning has served the Fund well since the beginning of the year, which once again enabled it to distinguish itself in terms of performance (+3.44% for the F EUR share class), while its benchmark returned -0.94%.

While yields on fixed income assets are now more generous, it seems more important than ever to be active and flexible to tackle the return of the economic cycle correctly. In this sense, Carmignac Portfolio Flexible Bond fund appears to be an ideal answer to maximizing the performance of a bond investment while mitigating the level of risk embedded.
In addition to the Fund's broad investment universe, we have the toolbox of instruments and experts who know how to select the right issuers to capture the generous premiums offered by the market. On the other hand, either benchmarked or passive strategies often have a high level of embedded risk (high duration, no yield curve strategy, no hedge), so we can easily negotiate the regime changes implied by the return of the cycle capture the dislocation offered by the market.
Our fund, through its investments in high value-added credit segments (structured credit, high yield, financial debt), inflation-indexed instruments, emerging debt and the duration strategies can be initiated through derivatives, is particularly aligned with future market challenges and should therefore continue to outperform in both absolute and relative terms.