Monthly Commentary - Pareto ESG Global Corporate Bond
In addition to a large focus on the US, there are still mixed signals from both economic data and company reporting. During the last part of the month, statistics came from China’s manufacturing industry that indicate a serious slowdown during the month of May. The manufacturing PMI came in at 48.8, indicating a slowdown in China’s manufacturing sector. Prices of raw materials such as copper and iron ore have been falling for some time now.
Within ESG, the development is going through new phases. A global survey conducted in March by Goldman Sachs shows that we are moving from “Aspiration to Action”, i.e., more concrete measures. Some examples that GS points out are “Engage more vs. Exclude” and “consider ESG Improvers”. This has resulted in a focus on, as they write, “Investments in Entire Supply Chain, not just Final Product”. Pareto ESG Global Corporate Bond fund has for some time now time worked with engagement and also placed a greater focus on companies in the middle part of the value chain. We see many attractive attributes in several of these companies both financially and in very concrete measures that these companies are taking now to differentiate themselves from competing companies.
The fund had a strong relative return against Bloomberg global high yield and investment grade indices, which fell between -0.5% and -1% this month. Interest rates in Europe and the US rose in May, while credit spreads varied, but overall widened somewhat.
The fund participated in five new issues during the month. All of these were for companies that the fund already owned bonds in. It is very interesting to observe the difference in financing costs, and that is precisely why we prefer companies which have extensive experience from many different financial circumstances.
The companies we participated in issues from were Iron Mountain, Crown, IQVIA, OI Glass and Solenis, which bought a company we owned (Diversey).
In addition, we sold off Schoeller Alibert and Catalent after a period of negative development. We believe the two companies will ultimately improve but see other companies with better prospects.
We would like to reiterate that the drastically increasing coupons, compared to what we saw just 12 months ago, contribute to the fund’s continued attractive performance.
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 tightened somewhat. The iTraxx Crossover index went from +440 bp at the end of April to +432 bp at the end of May.
Despite these dark clouds, the volatility index VIX is down to a year-to-date low of around 16. The credit index iTraxx stabilised during the month, which provided support to an increased new issue volume for global corporate bonds. The flows helped support the market, with the US seeing inflows of nearly $8 billion into high yield funds in April.
What we see as still looming and likely to worsen is the deteriorating sentiment for commercial real estate in both the US and Europe. Tightened financial requirements for loans and pressure on interest coverage ratios will weigh on this sector for some time to come. Working from home is changing the landscape for office districts.
The fund had a positive return this month as well. We participated in two new issues during the month. These were Gruenenthal 6.75% and Loxam 6.375% Sustainability Linked Bond (SLB).
We would like to reiterate that the drastically increasing (from an investor’s point of view) coupons, compared to what we saw just 12 months ago, contribute to the fund’s continued attractive performance.
ESG and sustainability continue to be a forceful theme. The fund published its annual sustainability report in April.
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 was basically unchanged in April. The iTraxx Crossover index went from +440 bp at the end of March to +440 bp at the end of April.
Portfolio management team:
Philip Lindgren
Portfolio manager
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