As Schroder ISF Global Credit Income celebrates its third birthday on 30 November 2019, fund manager Patrick Vogel looks back at what has been a particularly eventful period in global credit markets, and ahead at how to best navigate a still unpredictable market environment.

Patrick, what have been your highlights or lessons learned over the last three years?

To say it has been an interesting three-year period, would be an understatement!  With geopolitical uncertainty coming centre stage, the onset of an economic slowdown and an abrupt, almost total surprise switch from monetary tightening back to easing has made life pretty eventful for credit investors over those three years.

As such, we are especially pleased to have delivered on our objective of providing a stable income stream and total return while mitigating drawdowns in periods of stress. If anything, we see these characteristics becoming even more important. As we look into 2020 we continue to see some exciting opportunities across the global credit universe, but we believe that a more selective approach that can avoid certain air pockets will lead to better risk adjusted returns.

We are not making wholesale changes to our investment approach given the strong results delivered, but we are always looking to innovate and strengthen within our investment process particularly with the strategy enjoying such rapid growth. I am excited to announce that Julien Houdain has recently joined Schroders as Deputy Head of Credit, Europe and will be a valuable addition to our team. 

 

I noticed that you have started to increase your allocations to US credit, what’s behind this?

Indeed, we started to move into the US investment grade (IG) market more significantly starting in August 2019.  At that point we saw a brief sell-off relative to global counterparts followed by a strong rally in both September and October.  Generally, we feel that the US economy is likely to be more resilient given it is more domestically focussed so we have started to rotate some exposure back into the US market, taking some profit on our positions in Europe.

We have been focusing exposures on the senior banking space as well as opportunities in the healthcare and technology sectors. Some of our investments in these sectors are involved in pioneering medical technologies, which looks set to be a good long-term theme.

About the fund

Schroder ISF Global Credit Income is an unconstrained global credit strategy that aims to deliver stable income while looking to mitigate drawdown risks relative to the broader credit market.

Find out more about the fund here.

Can you describe a recent theme that has been driving overall positioning?

The European real estate market has been particularly well supported by a number of themes which has driven our positioning:

  • Theme one: The un-intended consequences of negative and ultra-low yields. Investors, particularly institutional investors, have been forced to increase allocations to real assets in order to generate greater income. We believe this phenomenon is likely here to stay which should support asset valuations.
  • Theme two and three: Related to the drive of millennials requiring more housing in urban areas and general trends in terms of immigration into the euro area. These supporting factors have been creating opportunities for providers of residential real estate across a range of markets.
  • Theme four: Income inequality, which has risen across Europe has had a slightly negative impact in terms of our overall views on the European real estate sector. Most obviously, the local government of Berlin imposed a rent cap on residential properties and other cities have discussed the idea. We believe that these discussions and the overall risk remains preliminary, but we are monitoring developments closely

Taken together we continue to believe that European real estate is well supported by the above themes and an area where we continue to allocate capital towards in the fund.

 

Finally, the rather lacklustre economic conditions aside, what are you looking forward to most in 2020?

As ever, the thing I look forward to most is the challenge of navigating markets in order to continue producing performance for clients. I think the world looks decidedly uncertain. Some of the big political issues, the trade war, Brexit, are showing signs of going in the right direction, but by no means should we be expecting fast or absolute resolutions to these.

The fund’s strategy of flexibility, diversity and importantly drawdown mitigation remains very well placed. We are confident in our positioning with our bias to investment grade, holding bonds of good quality businesses across industries like healthcare, real estate and technology. I look forward to continuing this in the years to come.

I would like to say as a final point, we are delighted to have seen the inflows and growth of the strategy in the recent past. I and the team would like to thank all our clients for their support and, as I say, we look forward to continuing to fulfil our objective of delivering income, while looking to mitigate drawdown risk relative to the global credit market.

Meet the manager

Patrick Vogel joined Schroders in August 2012 as Head of European Credit. Prior to joining Schroders, Patrick held roles at Legal & General Investment Management as Head of European Credit and at Deutsche Bank as a senior portfolio manager. Patrick has a Dipl-Kfm degree in Business Administration from Johann Wolfgang Goethe-Universitat Frankfurt am Main.

Source: Schroders, as at December 2018

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