Pareto Global Corporate Bond Monthly Commentary March 2020:
"We thought that we had the answers. It was the questions we had wrong"(U2, 11 O'Clock Tick Tock; 1980 " Under a Blood Red Sky")
Our society is under enormous pressure, and we will write more about the market and the fund, but of course we are deeply sympathetic with many people around the world who have and will have a very difficult time. The clock strikes 11 O'Clock, as U2 writes, and we may not have asked the right questions. What we can say though, it is that the market dropped severely by the most since the Lehman bankruptcy in 2008. We observed some of the biggest declines in risk assets of all time.
Such a sharp decline also creates great opportunities. Every 5- 10 years, some crisis occurs, and investors get very well paid to finance companies around the world. We are there now. Even higher quality companies need to pay much more than just two months ago in order to secure financing. The fund has a more defensive tilt than ever before. The fund is overweight the healthcare sector, IT, telecom, forestry, utilities and life insurance companies. The excess return is high enough for our focus sectors that we do not want to try to increase the risk to sectors and companies that are likely to face a more uncertain future ahead.
In corporate bonds, the market was down sharply and liquidity was much worse. Massive stimulus measures at the end of March contributed to improved liquidity. BlackRock was commissioned by the Federal Reserve to buy investment grade bonds in the new issue market and in the secondary market. It was the starting point for a new issue bonanza in both the US and Europe.
On March 27, 34 companies succeeded in issuing bonds for $65 billion. Sectors which face enormous challenges, including aircraft manufacturers and the automotive industry, also succeeded in securing bond financing. A few examples of these are Airbus and Daimler, which issued large amounts across the curve. This is a very important step for the recovery, that companies are able to tap several avenues of financing.
Oil prices fell sharply, and Saudi Arabia and Russia are playing hardball against the United States. The consequences will be huge with an oil price below $25 a barrel. In the oil industry, bankruptcies will increase significantly. The Barclays High Yield Energy Index fell 33 percent just in March. The Pareto Global Corporate Bond has no investments in the oil or commodity sector.
Credit spreads fell sharply, both for the cash index and for derivatives, especially during the latter part of the month. The fund also fell sharply during the month of March, when more defensive sectors were affected as well by the market turmoil, when credit spreads widened so significantly in such a short time. Cyclical names and commodity-related corporations had the worst performance.
Of course, it is difficult to see the turnaround soon, but we believe that with clear support from central banks and governments around the world, the market will stabilize. We saw signs of it already during the last week of March and our defensive holdings performed well. However, there is still a high yield to maturity for the fund at just over 8 per cent. In a historical context, we now see a very attractive level to buy corporate bonds.
The fund did not take part in any new issue during March. In the secondary market, we sold some of the cyclical suppliers to the automotive industry, such as Grupo Antolin and Norican. The fund also took the opportunity to buy high quality names like DaVita and Ericsson at attractive levels.
Synthetic CDS credit indices sold off massively during a volatile end of the month. The iTraxx Crossover index went from +305 bp at the end of February to +601 bp at the end of March.
Portfolio management team:
Philip Lindgren
Portfolio manager
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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.