FAM,
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Fisch Asset Management believes that there are currently two important ingredients to a successful IG corporate bond portfolio: (1) A holistic market perspective to identify and position for relative value opportunities across regions, currencies and credit qualities, and (2) active duration management.
“For 2021, we remain optimistic about the prospects for IG corporate bonds to generate excess returns in the low- to mid-single digits (compared to risk-free government bonds with the same duration),” says Maria Staeheli, senior portfolio manager at Fisch Asset Management and co-manager of the Global Corporates strategy. Staeheli continues, “The volatility, which we experience at the moment, confirms that investors are keeping a close eye on valuations. According to the most recent investor survey by Bank of America Merrill Lynch, IG investors currently tend to be overweight risk in their portfolios. Nonetheless, we don't think the IG corporate bond market is in a 'bubble': IG investors' cash holdings are relatively high at the moment, given the expectation of high volumes of new issuance at the start of each year.” However, this very supply is currently falling short of expectations. A trend that is likely to continue as the year progresses, as corporates issued bonds on a large scale to raise crisis liquidity in the wake of the Covid-19 pandemic. A good portion of these funds may end up not being required by the business and once the economy recovers, it may be used to fund bond repurchases by these issuers.
In addition, following an increase in interest rates of roughly 70 basis points since August 2020, the USD IG market recently entered a stabilisation phase. Thanks to lower currency hedging costs, the market now looks very attractive for international investors, who have to contend with negative interest rates in their home currencies. Continuous fiscal and monetary stimulus combined with a potential acceleration of vaccination programs in the coming weeks should further fuel the economic recovery. “The volatility we are currently experiencing is, in our view, a sign of a very healthy market. Periods of spread widening should therefore be seen as buying opportunities,” elaborates co-manager and corporates expert Oliver Reinhard.
Furthermore, an imminent transition to "tapering", i.e. the gradual exit of the US Federal Reserve from quantitative easing, is not currently seen as a risk by the portfolio managers of the Fisch Global Corporates strategy. “Fed Chair Jerome Powell is currently strongly emphasizing that these considerations are premature. We expect the Fed to have learned its lessons from the 'taper tantrum' of 2013 and to choose a more careful, and in case of doubt, over-cautious communication strategy this time,” explains Staeheli. An additional modest increase in interest rates is certainly conceivable, but it is unlikely to be of comparable magnitude to the increase we’ve experienced over the last six months. Importantly, a weaker US dollar would support commodity markets and emerging markets, benefiting investors who actively position for relative value opportunities globally.
Emerging markets attractive due to higher catch-up potential. Prefer USD IG to EUR IG.
Reinhard comments on the positioning of the strategy: “An exposure to emerging market corporate bonds is currently an attractive portfolio component in our view. In emerging markets, there is still a relatively good catch-up potential in terms of spreads, as most EM central banks have not conducted direct purchases of corporate bonds. In terms of currencies, we prefer USD IG bonds to EUR IG bonds at the long end of the curve because both the USD yield curve and the USD spread curve are relatively steep. The gap in interest rates between euro and USD bonds has widened in recent months. Therefore, even after currency hedging costs, investors are better compensated for holding bonds denominated in USD.”
Flexible duration management exploits yield pick-up offered by long maturities
Staeheli emphasizes the importance of duration management: “Within our corporate bond strategies, we manage duration exposure separately from credit exposure. This allows us to benefit from spread tightening even in longer duration bonds without necessarily incurring the underlying duration risk. Given our favourable view of risk markets into 2021, we currently hold a modest overweight in credit exposure but hold a slightly lower interest rate duration compared to the benchmark (ICE BofAML Global Corporate & High Yield 20% Country Constrained Index).”
Financials should benefit from higher interest rates
Reinhard elaborates on the strategy’s sector positioning: “We are overweight financials on a tactical basis, given that the sector benefits strongly from the economic recovery and the reflationary environment. We do not think that the sector is out of the woods yet in terms of credit losses. However, the significant capital build-up that resulted from widespread dividend bans should provide enough cushion to absorb the charge-offs to be taken in 2021. Elsewhere, we remain neutral in the energy sector overall. An increasing focus on ESG topics, including climate-related policy priorities under the Biden administration, is likely to influence the spread development of the sector more strongly going forward. Therefore, fundamental credit analysis that integrates an ESG perspective remains essential for us. We are underweight on real estate and utilities as we expect these sectors to face headwinds due to higher interest rates.”