インタビュー
We conducted ainterview with Mr. Mark Farrington of Bankers Trust.
Mr. Farrington is the portfolio manager for The Vintage Funds, which invest in bond and currencies and are categorized in the Bond Investment Trusts by the definition of the Investment Trusts Association. There are 6 Vintage Funds, with different settlement periods under management (Jan-July Type, Feb-Aug Type, Mar-Sept Type, Apr-Oct Type, May-Nov Type, June-Dec Type.)
Vintage Fund
Whais the objective of the Vintage Funds?
The objective of this fund is to deliver 200 basis points or better
over Yen 3-mo LIBOR rates, after fees, over a consistent 2-yeatime
frame. It is further our objective to deliver returns with volatility
less thathaof the market ? defining the market aweekly foreign exchange
volatility.
Whaare the characteristics of the funds?
The
characteristics of this fund are thait invests in high quality (aor
higher) bonds, while managing currency exposure from both a hedging
and a profit-making strategy. Duration is limited to approximately
two years, which results in most of the positive Nacontribution coming
from FX movements.
How are the assets allocated?
This
fund invests on an opportunistic strategy, ie, only the best investment
ideaare employed. aa result, broadiversification is not aobjective.
Therefore, asset allocation by country depends solely on the confidence
level of ainvestment ideaIn the past, because of the substantiastrength
of the US dollaand asset markets, the asset allocation to the US habeen
the highest. This would be followed by the UK and then Germany.
Current Asset Structure = 33% US, 8% Germany, 2% Spain, 57% Japan
Hathere been a major change in the asset allocation by this countries
this year? If yes, whaare the factors behind those changes?
The
major change this yeahabeen reduced position in UK Sterling. The primary
reason behind this is thawe believe thathe UK will slow down quite
dramatically, ie, a ‘hard landing.’ aaresult, we are not
comfortable with Sterling risk athis juncture. We are constructive
on UK gilts, but hedging costs are too high and do not allow a low
risk waof capturing this fixed income opportunity.
How is the asset allocated among bonds, currencies and stocks?
No
stocks are permitted in this fund. afor currency exposure, current
fund structure is 42% US$, 10% DM, 48% yen.
Why do you have the ratio of bonds relatively low around 18-19%?
The
ratio of bonds is low because we hold long term bonds, mostly 10 yeabonds,
which pushes the weighted duration of the portfolio out to its 2-year
limit with a relatively small position (approximately 25% of assets).
The yield curves around the world are generally in a flattening trend
and therefore we choose to be athe long end. The one exception is
Spain.
Under whacircumstances do you intend to increase the ratio of bonds
in the funds?
We
would increase the ratio of bonds if we believed thathe centrabanks
around the world were on the verge of a number of successive officiarate
cuts. This is currently not the case. The BOE mabe forced to do so
next year, and even the Fed is likely to ease a bit next year. Otherwise,
in the current environment most centrabanks are on hold, with the
exception of peripheraEurope where countries like Italy and Spain
must cut rates to converge on Germarates by next year.
How are the performances of the Vintage Funds?
Performances
are afollows:
(aof Aug. 14th, 98)
| Fund | Jan-July | Feb-Aug | Mar-Sept | Apr-Oct | May-Nov | June-Dec |
| Launch Date | 7/25/97 | 8/22/97 | 4/25/97 | 10/24/97 | 5/23/97 | 6/27/97 |
| Distribution per share athe 1st settlement | Y486.54
(01/20/98) |
Y713.78
(02/23/98) |
Y0
(09/24/97) |
Y459.21
(04/20/98) |
Y498.07
(11/20/97) |
Y551.59
(12/24/97) |
| Distribution per share athe 2nd settlement | Y779.00
(07/21/98) |
-
(08/20/98) |
Y486.03
(03/23/98) |
-
(10/20/98) |
Y131.95
(05/20/98) |
Y321.72
(06/22/98) |
| Price (aof Aug 14th, 98) | Y10,192 | Y10,421 | Y10,316 | Y10,448 | Y10,272 | Y10,223 |
| The number of days since launch | 386 days | 358 days | 477 days | 295 days | 449 days | 414 days |
| Performance, incl. profit distributions, since launch | 14.6% | 11.3% | 8.0% | 9.1% | 9.0% | 11.0% |
Whado you attribute to higher performances of the Vintage Funds over
other bond funds?
Our
higher performance habeen driven primarily by Dlr-Yen and Yen-GBP
investment. We accurately caught the sharp rise in Sterling last year,
awell athe structuraweakness of the Yen against all currency, in particularly
the US dollar. We were also fortunate enough to reduce our positions
substantially aheaof the two bouts of BoJ intervention, which reduced
our Navolatility and provided us with excellent entry levels for new
non-Yen investment.
We have also haaexcellent track record in bonds, with every position successfully returning profits to date. Treasurys have been the biggest contributor, but we have also generated capital gains in Bunds, Bonos and Aussie bonds this year.
Whais the foreign exchange hedging policy of the funds?
As for FX hedging, we do not tend to think too much
in hedging terms. We typically look to invest unhedged in globabond
markets thalook attractive from a totareturn sense ? bonds plus foreign
exchange exposure. If we do hedge, it is usually only in case where
the currency offers yield enhancement through hedging. For example,
we did buy GermaBunds hedged into US dollars this year, because the
hedged yield is higher thaunhedged. Otherwise, we use hedging in cases
of sudden event risk (such aBoJ intervention) emerging in the middle
of our medium-term trend outlook.
Are you expecting the USD to continue strengthening toward the end
of year?
We
expect the US dollato strengthen steadily throughout this yeaand partially
into next year. We expect the turning point for Japato be around September
1999, in terms of economic activity. The Dlr-Yen maturn earlier, but
in generawe see the high for the dollabeing around 155-170. For the
Mark-Yen around 85. The globaeconomic environment is deteriorating
around Japan, which does not bode well for aearly reversal. The US
will continue to have the hardest currency and the best performing
assets world-wide, aleast through mid 1999.
Do you have anything you want to tell to Japanese investors?
The
message I would like to stress to Japanese investors is thato understand
thawhen they invest in foreign stock and bond funds their primary
risk remains the Yen exchange rate. The FX volatility has out paced
asset volatility consistently over the past few years. Therefore,
they should invest in funds thahave aportfolio manager whom is very
experienced in managing the Yen, awell aforeign stock and bonds. You
will be able to identify these funds by the volatility of their returns.
BT haconsistently delivered returns with lower volatility thathe market,
which means superior risk management.
Cayou briefly tell us your background and experiences aa fund manager?
for
myself athe fund manager, I think one of the most distinguishing features
is thaI have lived in Japafor nine years and have a lot of experience
managing Yen assets. Therefore, I invest in foreign assets from the
perspective of a Japanese investor, which is whathe customers of my
fund are. Recently there habeen a boom in foreign bond funds in Japan.
Foreign companies have promoted their superior skills in managing
foreign assets, which is true. However, very few have superior skills
in both the management of foreign assets and Yen assets. If the number
one risk in your portfolio is the Dollar-Yen exchange rate, it does
not matter how good you are at managing foreign equities or bonds.
Your fund will lose money on FX.
Thank
you very much.
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