Quarterly Review - Seite 2

 

Manager Commentary

Pleasingly the Company delivered another quarter of strongly positive performance. The Company’s NAV total return in Q1 was +2.42% which outperformed the benchmark for the third consecutive quarter. The NAV total return also outperformed comparative investment grade fixed income indices such as the ICE BofA Sterling Corporate and Collateralised Index (+0.16%), the ICE BofA 1-3 Year BBB Sterling Corporate Index (+1.31%), and the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index (+1.78%). Performance was driven by a combination of income accrued over the quarter and capital gains as the portfolio benefited from the rally in credit spreads, whilst we also realised notable gains from asset sales.

 

Credit markets appeared to shrug off the interest rate repricing as spreads continued to tighten over the quarter, supported by a strong demand for the asset class. Despite a historically large supply of investment grade corporate bonds, investors were able to easily absorb the excessive supply, pushing spreads lower, with most deals heavily oversubscribed and with little concession to secondary curves. Into the market strength we sold down a number of bonds where credit spreads had tightened significantly from where they were purchased to levels where, in our opinion, they looked expensive. These included some of our remaining European REIT exposure (NE Property, CTP, Balder), dollar denominated blue chips (Warner Brothers, General Motors) and European energy hybrids (SSE, Iberdrola). In selling these bonds we were able to crystalise healthy capital gains which contributed to the Company’s outperformance versus the benchmark.

 

Whilst we still view investment grade credit as robust, in our opinion spreads now look expensive. Considering the challenging business conditions that corporate issuers face, including but not limited to higher borrowing costs and political uncertainty; we don’t believe that at current spread levels investors are being adequately compensated for taking on risk. In addition, historical observation suggests that the potential for further aggressive spread tightening from current levels in Investment Grade is limited. On a relative value basis we favour the risk-return characteristics available in alternative asset classes such as ABS and CLOs where we have been able to invest in debt of a higher credit quality whilst achieving a greater return. Recent activity has seen us selling BBB corporate risk at +180bps and buying A-rated ABS tranches at +280bps. During the quarter we took an additional £8m of exposure to ABS or CLOs, including a further £2m investment into M&G Lion Credit Opportunity IV and an additional £1.8m in ICSL 2 B, a quasi-private securitisation of UK student loans sponsored by the Secretary of State for Education. £3.5m of this exposure was taken via further investment in the M&G Senior Asset Backed Credit Fund which we use as a short-term cash park vehicle but which actually offers a comparable yield to parts of the BBB-rated euro and sterling credit markets.