Fund in focus: Chenavari Ucits fund is no B-team

Chenavari Ucits fund is feeling well-positioned among market turmoil, after taking single-B profits

The Lyxor Chenavari Credit Fund has posted impressive returns over the last year, managing an 8.2% return (SI USD Share class) over a 12-month period compared to an average of 5.6% for the credit UCITS category, according to Alt Credit data. The fund has also reportedly witnessed a positive start to 2020, posting a year to-date net return of +2.34% as of 20 February.

The fund is hosted on the Lyxor platform and is managed by Demian Brasil and Stephane Parlebas who are also partners at Chenavari.

It divides its strategy into 2 key sub-strategies, a financials strategy and a corporate strategy, which are complemented by a tail strategy, convexity. Unlike most credit UCITS funds, set up by managers who also have hedge funds, the fund has a completely separate portfolio management team to the firm’s less-liquid stablemates.

‘Dedicated UCITS PMs ensure full focus on an investable universe in line with the fund’s mandate’ says Brasil.

The financials credit section has largely been focused on subordinated debt from national champion banks in the continent, such as French ‘disco’ bonds (discount perpetual floating rate securities) and subordinated bonds from Deutsche Bank, as well as more senior paper in Italian banks, having recently taken profits on some Unicredit securities. The fund has also recently taken positions in UK banks that could benefit from ratings upgrades.

The convexity strategy was a slight detractor in January, the strategy trades in CDS indices, single names and options, the manager noted that the iTraxx Crossover index had been used as a proxy hedge for further spreading of the coronavirus. Elsewhere a number of idiosyncratic moves in the US and Europe had roiled some single names, but overall correlation has actually increased in the CDS market recently, and skews on the indices have been held in negative territory.

One of the biggest drivers for the fund’s returns over recent months has been its corporate credit strategy. In particular, positions in single-B rated credits, and investment grade credit.

“The main driver of performance over the last few months was the long exposure on Consus Real Estate that jumped approximately 15 points after ADO properties offered to buy its main shareholder, Adler properties.” says Brasil “ADO also purchased 22% of Consus plus an option to buy another 51% in the future. ADO properties is BBB rated and therefore, it should take advantage of its lower cost of debt to refi Consus liabilities.”

The fund also held short positions in an Italian toll operator, and an Eastern European cable operator, and had been building cash positions in the hope of compelling new deals coming to the market, or market weakness that could provide a better entry point, according to an investor letter from January seen by Alt Credit. Meanwhile the sub-strategy is profiting from a flight to safety in its investment grade bonds, which have also benefited by the ECB’s bond buying, and current market fears.

“The current coronavirus outbreak in Europe will derail the economic recovery expected by the market. Confidence will deteriorate, consumption will shrink and industrial production will suffer in those affected areas,” says Brasil “Given the current rich credit valuation there is plenty of room for a lower repricing. The fund will attempt to take advantage of the increased volatility to source new investment at an attractive price while protecting the downside via its shorts.”

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