Interview with Salim Khalifa, Manager of CM AM Institutional Short Term and CM AM Short Term Bonds

Interview with Salim Khalifa, Manager of CM AM Institutional Short Term and CM AM Short Term Bonds, two competitive funds compared with more traditional money market and bond products.

Short term rates have risen steadily since the beginning of the year. For example, the 1 year swap rate rose by more than 300 bp over the period.
Against this backdrop, short term money market and bond funds have suffered a relative underperformance since January 2022. Their valuation moves in the opposite direction to interest rate movements. Nevertheless, thanks to very short average maturities, the consequences for investors already exposed can be controlled. Indeed, if the investor's investment horizon is between 6 and 12 months, it is easy enough for him to recover a return higher than money market investments over this horizon, even if in the meantime the fund is exposed to the fluctuations of interest rates. Moreover, since the ECB's effective rate hikes, fund performance has stabilised.
Actuarial yields are becoming very attractive. They quickly moved from negative levels to largely positive levels: Around +3% of the top 2 funds in the range are CM AM Short Term Bonds and CM AM Institutional Short Term. These expected returns continue to increase as portfolios roll over into increasingly profitable vehicles and thus accompany the rise in rates.
The shape of the yield curve is interesting for two reasons:

• First, we believe that once interest rate movements have stabilized, short term bond funds could widen the gap with money market funds and deliver a 1.5% higher return relative to them. The sharp steepening of yield curves on the short end should benefit funds with an average maturity slightly higher than money market funds.
• Second, the flattening of the curve beyond 3 years makes funds attractive for long term investments and become competitive in terms of TRA relative to conventional short term bond funds. These long term cash products are clearly immune to interest rate risk, unlike benchmarked or maturing funds. Very low modified duration (close to zero) makes it possible to accompany the ECB's restrictive monetary policy and not to suffer unpleasant surprises related to inflation. For example: An investor subscribing 2 months ago in a 5 year IG fund could expect a 3% TRA. Two months later, our short funds embark on this same level of TRA for an average maturity of less than one year.

In short, our goal remains to outperform the money market fund. Recently, however, funds in the range have become a credible alternative to traditional short term fixed income investments with very low management fees.
More anecdotal: After 3 years of history, CM AM Short Term Bonds was awarded 5 stars by Morningstar and Quantalys.

Drafting completed on 14/11/2022