Watch: Taking stock after a remarkable period

Find out more about global credit investing here.

Corporate bond markets' reaction to the crisis

Due to the deteriorating economic environment and expensive valuations, we initially took a defensive stance within our strategy and preferred investment grade over high yield bonds, non-cyclical over cyclical companies, and senior over sub-ordinated debt.

However when lockdowns were implemented globally, there was an underperformance across the entire credit market, resulting in investors scrambling to sell regardless of company fundamentals. Credit spreads increased sharply as the market perceived a greater likelihood of defaults, not only in high yield, but within investment grade as well. We saw this as an opportunity.

How we responded to the market stress

Our credit analysts stress tested each holding within the portfolio to better understand the solvency of a broad array of companies and how they might fare in an environment where revenues would potentially go to zero.

We aggressively utilised liquid assets to deploy capital into the marketplace at the end of March. The scale of mispricing presented attractive opportunities, which allowed us to generate returns of 5% to 20%.

We saw select opportunities in emerging markets such as Mexico, Chile, and other parts of Asia  with supply chains linked to China and the US, that could benefit from lifting of lockdowns in those countries.

There are also opportunities in high yields but selection is key due to the great disparity of returns in different sectors.

Pushing strategy performance back into positive territory

At the peak of lockdowns, the entire market suffered a drawdown, and so did the Fund. However, we experienced a lower drawdown than associated exchange traded funds within the investment grade, high yield and emerging market space. Our more liquid exposure and contrarian approach enabled us to take advantage of opportunities, pushing returns back into positive territory in the second and beginning of third quarter.

Uncovering the opportunities going forward

We believe global credit still offers value to investors as a source of income, with higher yields than other asset classes like world equities and global sovereigns. Within the corporate bond space, we have a focus on the higher quality part of the high yield bond market, and continue to see opportunities in select emerging markets.


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