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Fixed income

How DNCA turned a black swan around

September 08, 2025 - 3 min
How DNCA turned a black swan around

At the start of 2020 many people around the world were gripped by images coming out of Australia. Mask-clad people were choking on the smoke of the worst bushfires in living memory in front of normally bright-blue water. Nobody knew that mask-wearing would soon become ubiquitous around the world.

It wasn’t until February that countries started to realise the significance of the Covid-19 outbreak. As fears started rising, the panic spread to financial markets. It was the ultimate black swan event for many investment managers, with nobody predicting the chaos this once-in-a-generation pandemic would cause. The S&P 500 fell more than 30% and $481 billion was withdrawn from global fixed income marketsp1.

For DNCA, like so many others, Covid did not start well. Around one-month after the start of the market correction its flagship fixed income strategy, Alpha Bonds, suffered its biggest drop since the strategy started eight years ago. Of course they were not alone in this, most equity and fixed income strategies experienced sharp drops. 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.

 

Swift portfolio repositioning the key to the turnaround

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 Fund dropped -13.3%, its maximum drawdown (biggest loss ever). However, the flexible setup of the fund and its high liquidity enabled it to quickly adjust to the new market conditions. The team closed its short position in G10 government bonds and shifted to long G10 government bonds, while maintaining its long position on inflation, with US TIPs. One of the reasons the Fund has such flexibility is because it invests in highly liquid securities like G10 government bonds. Its Bloomberg liquidity score is a high ~90%. You can see in the graph below the big shift it made in duration and overall positioning in early 2020.

 

modified duration
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 Fund to recover fully from the drawdown by November 9, 2020, ending the year with a positive net performance of +1.6% in USD.

 

Performance
Source: DNCA Finance and Bloomberg as of 28/02/2025. Past performance is not necessarily indicative of future performance. Data may change over time. 1 H-IA (USD) share class (ISIN: LU1859213875). 

 

Flexible by design

This is one of the key strengths of DNCA’s flagship fixed income strategy, Alpha Bonds, its nimbleness and agility. The strategy is deliberately designed to be as flexible as possible so it can adjust quickly to changing market conditions. It is able to take both long and short positions and actively manage its modified duration range of -3 years to +7 years. This flexibility allowed the investment team to quickly reposition the portfolio to recover from its biggest ever drop, its maximum drawdown, to register a solid absolute return within eight months.

While other fixed income funds might have performed better in 2020, most of these funds were focused on yield and so were mostly 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 fund 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.

1 International Monetary Fund, Morningstar

Additional Notes

This document is provided by Natixis Investment Managers Singapore Limited (Company Registration No. 199801044D). The Fund has been recognized under the Securities and Futures Act 2001 of Singapore, and Natixis Investment Managers Singapore Limited is appointed as its Singapore Representative and agent for service of process. Past performance of the Fund or managers, and any economic and market trends or forecast, are not necessarily indicative of the future or likely performance of the Fund or the manager.  The value of investments and the income accruing, if any, may rise or fall and investors may lose the full amount invested.  Investors investing in funds denominated in non-local currency should be aware of the risk of exchange fluctuations that may cause a loss of principal.  Investments in the Fund involve risks, which are fully described in the Prospectus.  The Fund may use derivatives for hedging and/or investment purposes.  The net asset value of the Fund may be subject to volatility as a result of its investment policy and/or use of financial derivative instruments.  Investors should consider the Fund’s investment objective, risks, charges, expenses and read the Prospectus and Product Highlights Sheet carefully and discuss with their financial adviser to determine if the investment is appropriate for them before investing.  However, if an investor chooses not to seek advice from a financial adviser, he/she should consider whether the product is suitable for him/her. The Prospectus is available for collection from Natixis Investment Managers Singapore Limited at 5 Shenton Way, #22-05/06, UIC Building, Singapore 068808 or any appointed Singapore distributor.

This document is published for information and general circulation only and it does not constitute an offer to anyone or a solicitation by anyone to subscribe for shares of the Fund as it does not have any regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document.  Nothing in the document should be construed as advice or a recommendation to buy or sell shares. Natixis Investment Managers may decide to terminate its marketing arrangements for this fund in accordance with the relevant legislation.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

DR73560