Manager Views - April 2016

While prices weakened and then recovered in the first quarter, two factors remain important for us: The credit quality of our companies and our coupon income. During the first quarter of 2016, we earned approximately 6.0% annualised from our coupons, capturing income at around 1.5%.

As for credit, the recent announcements from the ECB were significant in reinforcing the economic case for investing in the credit market. As part of the new ECB stimulus measures, Mario Draghi announced a step up in pace of QE and has extended it to purchases of corporate bonds in order to stimulate the economy. It is clear from such actions that policymakers want growth levels to keep moving upwards in order to avoid deflation. The ECB also launched a new initiative where banks will be paid for borrowing money, but only if the funds are redirected in some way back to the real economy as household or company loans. European growth is already in the process of picking up and the new measures in turn help to support the corporate bond market and its price trajectory.

In terms of interesting opportunities, as the Fed announced a delay in raising rates, the prices of floating rate notes linked to the Libor have dropped to attractive levels. An example is a Barclays euro-denominated floating rate note paying Euribor plus 39 bps with a yield to maturity of 2.2%. When expectations of rate rises return, we expect to see some good capital gains, and in addition we get paid for waiting until that happens. Another bond we hold is Anglo-South African financial services group Old Mutual. The group will split into four main businesses and it has been implied that the bonds will remain in the holding company. However, following the split, there will be less need to hold so much debt at the holding company level so the expensive bonds, with very attractive coupons of above 7%, will probably be bought back at a premium. The process of splitting into four companies will take around 2–3 years, and hopefully the bonds will be bought back at a 2–3% premium. If that does not happen, then we will be happy to simply collect the coupons.

We like diversifying our portfolios and have 20% of our holdings in names beyond financials. Companies like BHP Billiton, Trafigura and Glencore have done well for us this year.

 

Manager Views April 2016.pdf
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