Faced with huge movements in the equity and bond markets and the first fears of renewed inflation and stagflation, investors are wondering which direction to invest in to reduce the volatility of their portfolios. A number of options are emerging to take advantage of financial opportunities
On the equity markets, the conflict in the Middle East turned the tally back to zero in the space of a few days, and even into negative territory. Yet the year was looking good and had got off to a good start. At the end of February, the Euro Stoxx 50 was up 5%. With the start of the conflict, the markets went down the slide.
This volatility can be difficult to digest in portfolios. One way of reducing it, while still hoping for a return, is to introduce credit/bond funds. But the choice has to be carefully made.
In practice, these types of funds, with their range of tools, are better able to manage these risks and cushion any negative effects by being more responsive. For example, by moving the duration slider on bonds held in the portfolio, but above all with the clever use of hedges that allow credit risks to be wiped out at the click of a button. But also in the opposite direction, by opening the sails wide to get the most out of the performance, when the weather is clear.
Because, like the equity market, the bond market has also suffered disruption in recent weeks. For example, the yield on Germany’s solid 10-year government bond, the Bund, rose from 2.65% at the end of February to 3% in mid-March. This movement corresponds to a price fall of 2.9% for a bond, albeit a defensive one, with an annual yield of 2.9%.
Amid inflationary and stagflationary concerns, especially as the war in Iran pushes up oil prices, equities and bonds tend to move together in the same direction (unlike in other crises).
Bonds lose their safe-haven status
This correlation undermines the value of certain portfolio models designed to insulate investors from sharp fluctuations in bond or equity prices. Because they generally move in opposite directions.
The danger of private equity
At the same time, the bond markets are facing further negative winds, this time linked to private credit. Private equity problems are “multiplying from quarter to quarter”, partly because of “the financial alchemy of promising liquidity that does not exist”.
The turbulence experienced by the Blue Owl fund bears witness to this! The Blackstones manager was faced with substantial withdrawal requests from one of the major private equity funds, a sign that private investors are starting to get nervous and pull out of this asset class. While JP Morgan’s high-profile boss, Jaimie Dimon, has been on the offensive, warning of what he calls the cockroaches of private debt. A market worth 1700 billion dollars.
Even if the situation is completely different, this event may bring back bad memories of 2008 for some… However, Nolwenn Le Roux, Bond Manager at DNCA and Henriette Le Mintier, Credit Manager at LFDE-LBPAM are reassuring.
In the face of this turbulence, the DNCA Crédit Conviction fund, which applies an active and flexible Total Return credit strategy to better adapt to a changing market, is staying on course, posting a performance of 4.22% at 18 March over the last 12 months, and limiting the decline in performance since the start of the year despite the sharp rise in yields caused by the conflict in the Middle East. Indeed, the rise in the price of a barrel of oil leads to more inflation (see the effect on the yield on 10-year Bunds quoted above).
And the fund demonstrates that it is possible to generate performance in all market phases by adapting to volatility, which can even become a source of performance.
To achieve this, the fund adopts an appropriate strategy involving two performance drivers: investment in credit via a defensive, balanced or offensive allocation, and active management of duration and credit exposure.
This second engine involves tactical management of bond sensitivity to limit the downside risk to the portfolio and reduce volatility.
It also includes active credit risk management through the use of a wide range of bond strategies.
An average of more than 6% over the last three years
In this game of looking in the rear-view mirror, DNCA Credit Conviction has posted a 14.65% performance since the end of 2023, when the strategy was implemented, proving that the fund knows how to take advantage of favourable phases and beat fixed-term and cash investment rates.
In the current positioning, the HY (high yield) portion has been reduced because, according to Nolwenn Le Roux, this niche needs growth to perform and yield spreads have become too tight, not fat enough for the risk involved, compared with the yields on high-quality bonds. “Currently, in our positions, we have increased our bond weighting in the defence sector, we retain a higher weighting in financial companies, which benefit from solid balance sheets, even though this weighting has been reduced over the last twelve months.”
The fund continues to attract
Finally, as a sign that this type of management is appreciated, these funds are surfing on their success and continue to collect flows, just like the credit market, according to the DNCA manager: “. Since 2025, Total Return strategies have continued to meet strong demand This demand has remained strong since the beginning of the year, to the detriment of fixed maturity funds. In my opinion, the main reasons for this are the higher yields compared with money market funds and inflation, and the flexibility of these funds, allowing them to adapt to market trends
Another concern
But the manager is also concerned about another issue: “Interest rates have become increasingly volatile since the start of the conflict. Short rates are rising as Central Banks may adopt a more restrictive monetary policy to combat inflation. Long-term rates are also rising because of growing budget deficits, which could worsen if growth weakens or if governments intervene to support the economy. This volatility in rates has an impact on credit and remains a key indicator of future market performance
