Monthly Commentary - Pareto ESG Global Corporate Bond
We are spending the last week of February in the United States, in two of the likely most divergent places of the country, New York and Alabama. Speaking with friends, businesses and investment banks, we find the storyline to be mostly in line with the economic numbers being released. Close to full employment, inflation is broad-based but coming down, and the general sentiment positive. The tug of war continues between a still expanding global economy and central bank actions to rein in inflation.
When we summarize the February development in the markets it is one of “awakening”. Central banks around the world need to continue raising rates. We observed stronger data regarding both employment and inflation both in Europe and the US. Risk assets reversed course after a very strong start to the year. There was a significant drop in US Treasuries and US investment grade. The Bloomberg Global Aggregate index declined 3.3% in February. In credits, US and European high yield outperformed investment grade. US high yield was down 1.6% and European high yield down 0,1%
The fund had another month of positive returns despite the reversal globally. Depending on currency share class, the fund rose between 0.2% and 0.4%. The vast majority of Q4 reports which came in during the month were positive, but also cautious looking towards 2023. Cost reduction plans in several companies have either already started or plans are in place. The focus for the fund is to monitor the balance sheet of these firms and we have favored companies with sound maturity structures for their debt. Fortunately, the public bond markets are in much better shape, and we are pleased to see many of our portfolio companies are successful in refinancing.
That also means the cash return (average coupon) of the fund will continue to improve. This is a fundamental change compared with the fixed income market the past 5–10 years.
The fund participated in two new issues during the month for existing holdings. These were Scan Global Logistics and Scatec Solar Green bond. To put things in perspective, Scatec bonds in 2021 had a 5% coupon and now the latest issue has a coupon starting at 9.8%. These are very significant differences and will continue to drive powerful cash returns in the fund.
ESG and sustainability continue to be a forceful theme and we are now seeing a development where companies must start to show more specifically what they are doing regarding sustainability in concrete numbers and not only through promises.
The strategy going forward remains having a strong focus on companies that contribute with sustainable solutions here and now.
The fund is classified as an Article 9 fund under the SFDR Disclosure Regulation.
The synthetic CDS credit index finished basically unchanged in February. The iTraxx Crossover index went from +414 bp at the end of January to +414 bp at the end of February.
Portfolio management team:
Philip Lindgren
Portfolio manager
Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager’s skill, the fund’s risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments. This is marketing communication.