Fund the Pictet Funds Euro

¶ … Fund

The Pictet Funds Euro Inflation Linked Bonds Fund was set up on the first of September, 2006. The stated objective of the fund is to "invest in Euro denominated fixed-income instruments mainly linked to inflation, either directly or through inflation derivatives." This product complements a broad lineup of fixed income funds, representing a number of European currencies and strategies. The fund can thus be used as a hedge against inflation-related exposure or to help diversify an existing portfolio of fixed income funds. The basic concept of an inflation linked bond fund is to generate returns in excess of inflation. This is aided by the purchase of inflation-linked instruments. A typical bond fund may not own such instruments. Thus, the returns on a typical bond fund may fall below the rate of inflation should the inflation rate increase rapidly.

To achieve this desired outcome, the Pictet fund employs a strategy of exploiting "market opportunities by managing different risk dimensions such as interest rate risk and inflation-related risk." To this end, the fund invests in a basket of Euro-denominated fixed income securities. The portfolio is comprised mainly of AAA-rated securities, with a component of a-grade securities to help boost the returns. Therefore the risk of the fund is characterized as low-to-moderate. The fund is invested in a wide range of maturities, with a duration of 7.58 years. The fund manager has stated that the fund as a "long duration bias."

The fund's composition is heavily weighted towards French securities, representing a total of 58.8% of the total fund. Other significant components are Italy, Germany and Greece. Just over 1% is cash.

Since its inception, however, this fund has performed poorly, both on an absolute basis and on a risk-return basis. The fund is measured against the Barclays Euro Government Inflation-Linked All-Maturity Index. The Pictet fund has returned -3.13% since its inception through the end of October 2008. The Index has returned -1.45% over that same period. The Index is comprised only of government securities, and is thus a lower-risk basket. Thus, versus the Index, the Pictet fund has underperformed both on an absolute and on a relative basis.

The fund has been able to enjoy some individual successes. It was able to outperform the index in a dismal October due to an 80% profit on a long position on the Japan 10-year real yield. However, such successes have been limited over the life of the fund. Examining the manager's comments and the comments in the annual report, it appears as though fund management is generally reactive to trends rather than proactive. The discussion centers on what happen in the economy and to the fund, rather than any discussion on what the fund is going to do to exploit opportunities.

The fund's heavy concentration in the French market has left it particularly vulnerable to shocks emanating from that market. For example, in the first quarter of 2007, the inflation index in France moved sharply lower, which was not anticipated by the fund managers. In the second quarter, the risk of a hike in VAT increased the volatility of French securities, in particular the short-range maturities. The result of this high level of exposure to the French market was that the fund suffered over this period as a result of these shocks. The lack of diversification in the fund should be viewed as a concern in light of management's inability to generate profit from their strong position in the French fixed-income market.