How DNCA turned a black swan around

In the early days of COVID-19, as fears escalated and panic spread through financial markets, the S&P 500 fell by more than 30% and more than $481 billion was withdrawn from global fixed income markets. It was the ultimate black swan event for many investment managers.¹

For DNCA, an affiliate of Natixis Investment Managers, like so many others, Covid did not start well. Around one-month after the market correction its flagship fixed income strategy, alpha bonds*, suffered its biggest ever drop. Of course they were not alone in this, most equity and fixed income strategies experienced sharp falls. However, it was at this time of crisis that one of the key aspects of the alpha bonds* strategy came to its rescue, its flexibility.

Flexible by design - swift repositioning the key

At the time of Covid-19 the DNCA alpha bonds team was anticipating solid global growth following the resolution of the US-China trade war and so had a short position in (nominal) G10 government bonds and a long position in Treasury Inflation-Protected Securities (TIPs). However, when the Covid-19 pandemic hit, everything changed. The market crashed as central banks slashed interest rates to zero and inflation expectations plummeted, adversely affecting both of these positions.

From February 17 to March 18, 2020, the strategy fell more than 10% its biggest loss ever. However, its flexible setup and high liquidity enabled it to quickly adjust to the new market conditions. The team closed their short position in G10 government bonds and shifted to long G10 government bonds, while maintaining a long position on inflation, with US TIPs. One of the reasons the strategy has such flexibility is because it invests in highly liquid securities like G10 government bonds. You can see in the graph below the big shift the team made in duration and overall positioning in early 2020.

Source: DNCA Finance and Bloomberg as of 28/02/2025. Past performance is not necessarily indicative of future performance. Data may change over time.

Recovery from biggest ever drawdown in less than 8 months

The quick, significant shift the investment team made allowed the strategy to recover fully from its biggest ever drawdown by November 2020.

While other fixed income strategies may have performed better in 2020, most were focused on yield and so were predominantly exposed to corporate credit. In 2020, liquidity in the corporate credit market essentially dried up, so stranding the assets in these funds until the US Federal Reserve intervened, leading to a recovery in the corporate credit market. DNCA alpha bonds* is a rare example of a strategy which was able to pivot quickly to the new conditions and turn a loss into a respectable gain, despite entering the COVID crisis in an unfortunate position.

Time for new approaches

This nimbleness and agility is one of the key strengths of DNCA’s flagship fixed income strategy, alpha bonds*. The strategy is able to take both long and short positions and actively manage its modified duration range of -3 years to +7 years. .