The definition of the "fixed income +" investment methodology can be illustrated by three dimensions and two aspects. On investment, it is necessary to consider how to invest in fixed income and "+", also how to achieve asset allocation, as a result, it is the way to access income and risk.
Yao Qiu has several years of experience in stock and bond investment, he is good at making the net worth of the portfolio continue to hit new highs while controlling the drawdown. According to statistics from China Merchants Securities, Yao Qiu has the longest track record in secondary bond fund (Xinhua Zengying), which is having about 54% cumulative return under his management, ranked top 7% of 210 secondary bond fund, with an 6.85% annualized rate of return, the maximum drawdown does not exceed 3.5%, while the maximum drawdown of peers fund benchmark for the same period is 13.47%.
Yao Qiu joined GF Fund in January 2022 and he is now the general manager of the fixed income department fixed income research department, currently managing GF Hengyue, GF Xinyu and GF Growth Choice. Since 17th October, GF Fund launched a new fund and it’s managed by Yao Qiu, GF Collective Bonds (Class A: 016424; Class C: 016425). The product is a secondary fixed income bond fund, the area of investment in bond is not less than 80% of fund assets, the total proportion of investment in stocks, convertible bonds and exchangeable bonds does not exceed 20% of fund assets.
Clear mindset on asset positioning, the valuation is the key to pursue synergy of equity and debt
Q: How to position bonds in the "fixed income +" portfolio, and what are your rationale in managing it?
Yao Qiu: My expectation in fixed income assets is that, whether the bond market is bullish or bearish, each calendar year can bring positive returns to the portfolio, and the base line is not bring losses to the portfolio. Therefore, I will be relatively conservative in bond investment.
First, strictly control in credit risk exposure and not going to do credit sinking. For the hybrid products, there’s low cost-effectiveness in taking credit risk. Once the credit risk occurs, it will exceed the risk tolerance in the portfolio. Therefore, the corporate bonds with heavy holdings in the portfolio under my management are all high-rated credit bonds with AAA rating since 2017. Under this strategy, the return on the coupon is relatively low but the safety of the portfolio is higher.
Secondly, use leverage appropriately. Based on the low interest rate market environment and the strong trading ability of GF, I will enhance the leverage ratio according to the capital situation, in order to obtain higher income.
Finally, grab the chance to take cost-effective interest rate risk, and take some return from volatility appropriately but not too aggressively. Regardless of market conditions, the duration will not exceed 3 years. If the market is predicted to be uptrend, the duration will be 2 to 3 years; if the market valuation is high and the transaction is crowded, I will control the duration to 1 year or less.
Q: What strategy do you usually use to enhance the return?
Yao Qiu: For hybrid products with fixed income bias, pure fixed income provides stable income, and convertible bonds bring increased income at certain points in time. The income of the former is relatively lower, and the income of the latter is uncertain. Moreover, we expect relatively controllable returns on equity assets. In other words, stocks and convertible bonds are the main sources of earnings growth.
For convertible bonds, I will judge by the conversion premium rate, pure bond premium rate, absolute price and the valuation indicators of the underlying stock corresponding to the convertible bond. When the convertible bonds are more cost-effective, I will increase the position of convertible bonds in different stages. For example, in the second half of 2014, the portfolio held 20% convertible bonds, and the income contribution for the year reached about 7 %; in 2019 and 2020, some convertible bonds were appropriately held. But from 2015 to 2018, basically no convertible bonds were bought from the secondary market.
Stocks is a key in contributing excess returns in portfolios. I formed three conditions in selecting underlying. Two of them are fundamental analysis (whether the profit model is clear and transparent; whether the core factors affecting the stock price can be observed and tracked), the remaining condition is valuation (the selected target should be in a reasonable valuation or underestimated).
After selecting a basket of targets that meet the above conditions, I will select the holdings by two dimensions: one is to make the holdings as balanced as possible, and the individual stocks to be held are appropriately dispersed and not to be exposed in a certain factor concentration; the other is to focus on valuation, strive to keep the valuation of the underlying positions at a reasonable low or below a reasonable range. I accept the existence of targets with reasonably high valuations, but the ratio should not be higher than 30%.
Q: How do you fix the allocation ratio of different assets, such as stocks, convertible bonds, and pure bonds?
Yao Qiu: My idea is to allocate and adjust positions based on the risk-return ratio of various assets under the principles of calculated total risk exposure and moderate diversification. First, with the risk expectation as the constraint, regularly measure the match between the valuation level of various assets and the fundamentals, and reasonably allocate the positions of stocks, bonds and convertible bonds. Second, on the basis of facts and pre-judgment, make strategic responses based on scenario analysis to ensure that the portfolio positions are under a condition of reasonable or relatively undervalued valuation.
Balance income risk and deal with uncertainty with probabilistic thinking
Q: How do you strike a balance between risk control and profit acquisition?
Yao Qiu: I think it can be viewed from two aspects. Firstly, risk control is the foundation of obtaining benefits, and it is difficult to sustain the practice of taking excessive risks to obtain benefits. Therefore, it is necessary to review the risk exposure of the portfolio at all times designing the portfolio and during the maintenance of the portfolio, try to avoid taking risks that may lead to permanent losses. On the other hand, it is necessary to distinguish which one is medium and long-term risk and which one is short-term uncertainty. If the market has given too high premium to short-term uncertainties, it may contain good opportunities.
Q: How did you control the drawdown?
Yao Qiu: Personally, I tend to control the drawdown in advance, also controlling the maximum drawdown by combining positions and total risk exposure. In my view, in terms of risk control, it is particularly important to do a better asset allocation. To be specified, we need to set a drawdown control target and disassemble it into the risk exposure of stocks, bonds, convertible bonds, and then determine different allocation ratios based on the valuation positions of various assets. In addition, the position structure should also be well regulated. When the market valuation is high, the total exposure should be appropriately reduced, assets that are obviously overvalued and driven by market sentiment should be appropriately avoided.
Q: Some people say that the most unchangeable item in the market is change. How do you deal with market uncertainty?
Yao Qiu: I think changes in fundamentals will definitely be reflected in asset prices. I will look at the fundamentals on a type of asset, an industry or a company objectively and rationally, and it is not guided by the market. On the other hand, I will always remind myself that as investment managers, no matter how hard we try, it is impossible to see the full picture of the fundamentals. Most of the time, there is a huge gap in between our views of an asset and what it really is, so uncertainty must be approached with probabilistic thinking rather than deterministic thinking.
(Note: The above is the current optimistic direction from the fund manager, it does not mean the long-term investment direction of the fund)