Monthly Commentary - Pareto ESG Global Corporate Bond
Inflation expectations in the US have risen in recent months, and in February this contributed to a sharp rise in long-term interest rates, in turn creating volatility in credit and risk assets. Eyes were once again turned towards central banks, where both the Federal Reserve and the ECB confirmed support and a long-term approach.
Global investment grade credits fell sharply during the month. Another observation is how important a balanced energy supply is. Texas had an incredibly cold winter freeze and the choice not to allow other states to contribute electricity had tragic consequences with several deaths due to the cold. The situation is of course more complicated than that, but a better balance in the grid system could have alleviated the situation.
New issue volumes in the US and Europe declined slightly as volatility increased towards the end of the month. Trading in the secondary market has been constructive, but cautious.
A large number of fourth quarter reports from companies in the fund came in during February. We see clear signs of the positive sentiment that, after all, exists in many sectors and companies. What is most impressive after such a major financial shock is how the companies have managed to keep operating results fairly stable even though sales have decreased a lot. The work the companies have done in combination with government aid has resulted in a significantly lower number of bankruptcies than many feared.
Despite the turbulence and large falls in most global credit indices, the fund's return was relatively unchanged during the month. The fund participated in several new issues, such as Kloeckner Pentaplast, Scatec Solar, Catalent and IQVIA. We have invested in and followed several of the companies for a long time. Kloeckner Pentaplast and Scatec Solar are new names in the portfolio.
Kloeckner Pentaplast is a global leading company in recycled content products and high barrier protective packaging, operating two divisions: Pharma, Health & Specialties and Food Packaging. The company innovates, designs and manufactures for sustainable solutions that its customers use to package and protect products in daily situations around the world.
In the secondary market, we picked up bonds in several names, such as Picard, Ball Corp, Kraton Polymers, Loxam and Digiplex.
Looking ahead, we believe that the greater part of the total return in fixed income will come from coupons and carry, and a smaller share from price movements. A well-diversified, global sustainable corporate bond fund is well positioned.
Synthetic CDS credit indices were volatile during month of February. The iTraxx Crossover index went from +269 bp at the end of January to +265 bp at the end of February.
Portfolio management team:
Philip Lindgren
Portfolio manager
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