Sponsor’s position paper by Patrick Zeenni and Fawzy Salarbux, Candriam Investors Group
When it comes to formulating a fixed income strategy, investors face a real Hobson’s choice.
The current investment landscape has left investors arguably bereft of the traditionally ‘safe haven’ fixed income asset class and at the mercy of economic and political shocks of divergent US Fed and major central bank policies. This has forced investors down the risk curve. With nearly one-third of government debt already in negative rate territory, the China slowdown, commodities drop and political uncertainties across Europe have all contributed to an uncertain macro- economic outlook and created significant disparities across regions and sectors.
The investment challenge lies in navigating within increasingly complex dimensions of risks whilst delivering returns. At Candriam, we believe that well thought out credit strategies which are actively managed and flexible in approach, whilst anchored in a robust risk framework, will have an increasingly influential role to play in investors’ portfolios.
Credit is for high conviction active management
Aside from this uncertain macro environment, we view the high yield market as a good carry opportunity for long-term investors who are searching for yield and can withstand some volatility. In a low-growth environment, issuers with high leverage are sometimes unable to meet their debt repayments, and smaller companies struggle to maintain their pricing power. Well-honed bond selection skills are required to identify, capture and benefit from these opportunities.
Our active management style has a proven track record of generating alpha whilst managing the key
sources of risk which a typical passive approach would be vulnerable to.
Our active positions are founded on a solid base of both fundamental and quantitative analyses, as well as a thorough legal review of covenants. We overlay this with a global big-picture view to ensure that the key drivers of performance and risk are captured. We invest in companies with strong liquidity profiles, robust governance, potential upgrade stories, deleveraging issuers, special situations (e.g. M&A, refinancings) and specific capital structure positioning (e.g. senior secured, hybrid corporates). We focus on finding niche and “best in class” players, such as value-adding issuers with high barriers to entry. A key element of our process is our management assessment, through several contacts and our ability to be an “on the ground” investment team.
Today, we focus on resilient sectors such as commercial services, TMT and real estate as they are less tied to overall growth than commodity-linked sectors such as energy, metals and mining.
The right tools for the credit mission
In order to achieve the twin objective of delivering returns whilst managing risks, we use several proprietary tools across our portfolios. We manage our portfolios with complementary performance drivers, whilst applying a strong sell discipline, triggered by both quantitative and qualitative filters. Our macro filter allows us to closely monitor the sovereign risk embedded in each issuer and informs our view on the € and $ exposures and sector allocations.
We also apply a level of ‘legal review’ in our investment process, through the use of legal experts. This enables us to remain very discerning about the covenant strengths and manage credit risk efficiently. This approach has served us well across our range of strategies to deliver a resilient pattern of returns whilst managing downside risks and building a strong track record in mitigating default risks.
We have successfully avoided all defaults since the inception of our credit strategies.
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