POSITIONING

The fund invests predominantly in investment grade issuers, but we are prepared to go down a company’s capital structure to find the best combination of yield, value and capital preservation. One feature of the fund is the substantial holding in financials, at 75.2%. Therefore, for some time we have positioned the fund to benefit from the continual improvement of credit metrics within European financials. Moreover, regulations have forced financials to build up capital and strengthen their balance sheets, all of which are supportive from a credit perspective. All the regulatory measures taken in the last 12 years have enabled financials to withstand the Covid-19 crisis. From a credit standpoint, financials are in an even stronger situation than prior to Covid-19, despite taking significant provisions for expected credit losses. In our view, subordinated debt holders of financials should benefit the most from this strength. Moreover, with spreads of these securities currently above 360 bps, we believe valuations are attractive. To put this into context, this is approximately four times the spread that one was capturing for HSBC’s tier one securities issued before the global financial crisis in 2007. This is despite the fact that, as mentioned above, financials have become stronger from a credit quality standpoint.

Investment grade issuers:

The spreads the fund captures are more than one would get for European high yield corporates, with the additional benefit that the average rating of the issuers held within the fund is BBB+.

High income:

Income is a significant component of returns, with a yield to maturity of 3.3% compared with 0.4% for the benchmark.

Low sensitivity to interest rates:

With more than 70% of the securities being either fixed-to-floaters or already floaters, we believe the fund is well-positioned for an environment of somewhat higher rates. Fixed-to-floating bonds are bonds where the coupon is fixed until the first call date within five to 10 years and then is re-fixed on a floating-rate note basis. During this quarter, the fund delivered a positive performance despite the rise in interest rates.

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