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Pictet AM's solution for active investing in CHF bonds

September 2021
Marketing Material

Active management

Aiming for steady positive excess return in all market environments.

Our objective is to generate steady positive excess return, in every market environment, while targeting capital protection by limiting drawdowns. To achieve this, we have designed an investment philosophy tailored to the CHF bonds market.

The CHF bonds market has unique characteristics such as high demand, a small number big of market participants, strategic investors, a high sensitivity to systemic risk and lower volatility compared to other fixed income asset classes. We see these characteristics opportunities for return generation. Therefore we have designed an investment style with the following characteristics. 

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Strategic: We focus on strategic active positions that reflect our anticipation of macroeconomic trends, systemic risk and credit events with a time time horizon of typically three months.

Strong conviction: We only implement strategies resulting from strong factual convictions. Our level of conviction and the timing on an active bet are firstly and mostly driven by fundamental research. Our discipline is to exit a position early when the level of conviction diminishes due to changes in the underlying fundamental factors.

Capital protection: We strongly focus on anticipation of credit events influencing solvency, rating and liquidity to avoid performance downside.

Cost reduction: We have low entry and transition costs thanks to an independent trading desk with no commissions, best execution principles and crossing opportunities between the portfolios. 

Strong commitment to responsible investment

Pictet Asset Management was an early adopter of the United Nations Principles for Responsible Investment (UNPRI) in 2007. We are convinced that Environmental, Social and Governance (ESG) considerations can help make better investment decisions while contributing to a more sustainable economy. Consistent with the fiduciary duty to act in the best interest of our clients and our adherence to the UNPRI, we are committed to integrate material ESG criteria in the investment decisions and ownership practices with a view to enhance returns and/or mitigate risks.
We have a four layered ESG approach applied in our active CHF bonds portfolios described as follows:
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Exclusions 
CHF Bonds portfolios respect the Swiss Association for Responsible Investment (SVVK/ASIR)  exclusion list the and Pictet Group exclusion list on companies active in anti-personnel landmines, cluster munition, chemical & biological weapons (including white phosphorus) and nuclear weapons from countries not signatory of the Treaty on Non-Proliferation of Nuclear Weapons (NPT). We further exclude coal extraction, tobacco, alcohol, gambling and adult entertainment with a revenue threshold of 10%.

Best-in-class
In our active products, we exceed benchmark weight only in companies with low carbon footprint. We use data from Trucost to filter the companies with low carbon footprint.

Integration
We integrate ESG factors in our credit analysis for the remaining investable companies and determine if these factors are fairly priced in the market. In our bottom-up company selection, we integrate ESG factors such as governance, controversies and accounting standards. For this purpose, we use various ESG data providers such as Sustainalytics scores and reports (covering E, S and G), ISS Governance scores and reports (covering G) and CFRA Creative Accounting reports. These ratings and reports are integrated into our portfolio management system. 
ESG rating alerts have been put in place by risk management team to quickly identify a deterioration or improvement in these ratings. All teams at Pictet Asset Management have a breakdown and evolution of ESG ratings formally incorporated into their performance reviews with the Chief Investment Officer.

Engagement
As a firm, we engage with companies that do not meet our ESG evaluation criteria but have the potential to improve in order to achieve a positive outcome within a certain timeframe. Our ESG evaluation is based on a combination of proprietary and external research. We practice targeted, collaborative and outsourced engagement in addition to direct engagement during company meetings. 

Pictet Asset Management has formulated a concrete process for corporates and sovereigns to positively influence ESG performance. Key criteria are the severity of ESG concern(s) and the likelihood of successfully influencing the issuer. The process is enhanced through a subscription to a third-party service provider. 

In addition to the approach described above for the active and passive portfolios, the CHF bonds team has over 20 years experience in customization of portfolios using specific ESG criteria defined by the client.