La Française: Target Maturity Funds, an effective tool for your asset allocation.
La Française Group is a leading player with more than 40 years of experience in creating and offering traditional and alternative investment solutions. La Française Group has developed a multi-boutique approach based on two cornerstones – real estate and financial assets.
Could you give us a short update on La Française’s profile, fundamentals, beliefs and performance?
In step with the vision of its shareholder Crédit Mutuel Alliance Fédérale, La Française is to become a leading player in the French and European asset management landscape. The group continues to be active across all asset classes, including listed and unlisted assets. Effective May 1st, La Française AM and Crédit Mutuel Asset Management merged, forming “new” Crédit Mutuel Asset Management which weighs €86 billion in assets as at 31/12/2023 and counts 172 professionals, based in France and Germany. Crédit Mutuel Asset Management offers a broad range of products and services, combining financial performance targets and sustainability objectives.
Why are Target Maturity Funds (TMFs) an effective tool for asset allocation; what is the target audience for TMFs?
TMFs are designed for institutional clients and/or private investors with a medium to long term investment horizon. These products are traditionally managed with a Buy & Hold strategy, even if you can have marginal active management, especially in the High Yield segment, to cope with default risk. The success, in terms of inflows and performances, of such strategies is the result of an attractive carry in the market as the base rate turned positive again for the first time in almost ten years following the restrictive policies adopted by Central Banks.
What are the main benefits of Target Maturity Funds and what is the difference between TMFs and Fixed Maturity Funds (FMFs)?
Target Maturity Funds (TMFs) or Fixed Maturity Funds (FMFs) have the significant advantage of being simple, comprehensible, and liquid products. The philosophy is to replicate as closely as possible the behavior of a single bond through a well-diversified basket of bonds to eliminate specific risks. These bonds traditionally have a maturity date close to the dissolution date of the fund. Also, as the fund approaches its maturity, the duration risk mechanically decreases making the funds more immune to interest rate fluctuations. Thus, in an uncertain context, TMFs offer investors a return up to a precise maturity, providing some visibility on the coupons that will be collected till the maturity date.
What do investors need to know about the Risk – Return correlation when investing in Target Maturity Funds? Onverwachte schokken
The main risk is the default risk. This is why at La Francaise Group we do manage our TMFs with a high level of diversification (between 100 and 150 issuers). Also, we carry out an in-depth financial analysis on each company on which we are involved, and we constantly monitor their credit profile development.
Besides default rates in the High Yield market are normalizing to converge towards their historical average. However, they are the result of a sum of idiosyncratic stories and not the consequence of generalized liquidity stress in the market. Therefore, securities selection remains a key element in this market segment, highlighting the attractiveness of active management compared to index management, which captures all market defaults, especially those of issuers with significant weights in the indices.
Target Maturity Funds present a promising alternative for investors seeking stability and predictability in their debt investments. Is there a possible downside to TMFs?
Even if investors have currently the opportunity to lock in attractive yields, returns are not guaranteed at maturity, and the fund’s performance path can vary depending on its risk profile (IG or HY) and market conditions. These products are sold and marketed over a defined term, so the volatility must be able to be sustained by investor over the life of the fund. The upcoming rate cuts do not call into question the expected final performance of TMFs but rather the speed at which this strategy will reach its “final” performance.
What would be your main message to the Fund Seminar audience (being independent wealth managers, wealth planners, small private banks)?
After an unprecedented monetary tightening in terms of magnitude and speed, the Fixed Income market has regained in competitivity against equities. In a scenario where economies are experiencing a soft landing with anticipated rate cuts, target maturity funds are a valuable component of an asset allocation. The absolute level of carry offered by this type of strategies allows for the absorption of defaults and any widening of risk premiums before losing money.
The higher the yield and coupons, the more investors can absorb defaults. Furthermore, investors can now position themselves in very high-quality issuers with coupon levels that were previously distributed by companies with weaker credit profiles. In other words, the average risk embedded in carry funds today is consequently less significant than a few months ago at an equivalent coupon level. Then any tension on rates or risk premiums represents an opportunity for us to optimize our entry point into these types of strategies.
