October, 2020
Activity
In the primary market, we bought the attractively priced 2027 US dollar bonds of Conagra. This is one the largest packaged food companies in North America, which we see as an improving credit, helped in part by material tailwinds from increased at-home food consumption that has resulted from the pandemic. We also bought the 2025 new issue US dollar bonds of the US truck-leasing company Penske. Its second quarter results showed that while the pandemic has resulted in weaker rental demand, this has been offset by stronger demand from grocery/ package deliveries and growth in new lease customers. We also bought the attractively priced new issue corporate hybrid bonds of the Spanish electric utility Iberdrola.
In the secondary market, we reduced some of our underweight in Boeing in light of more positive recent newsflow regarding the possible return to operation of its grounded MAX aircraft range. On the sell side, given increased uncertainty regarding the demand outlook for oil, we trimmed our energyrelated exposure by selling Western Midstream, Florida Gas Transmission and some of our corporate hybrid holdings of the Italian energy company Eni. Owing to reduced conviction at more elevated prices, we also reduced exposure to the Mexican telecoms company America Movil and Royalty Pharma.
Performance
The Fund underperformed the benchmark over the period. In terms of individual securities, less favourable news in terms of some countries re-imposing stronger lockdowns weighed on the Eastern European-focused shopping centre company NEPI Rockcastle. In addition, an underweight position in Boeing detracted from relative returns amid increasing hopes that its MAX range of aircraft might return to service in the next few months. On the positive side, there were contributions from the long-dated bonds of the US telecoms company Verizon, the air conditioner manufacturer Carrier Global and Apple. The Brazilian paper company Suzano was another relatively strong performer.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/Arb.pdfAugust, 2020
Market Review
With spreads tightening by a further 7 basis points, August was the fifth consecutive month of recovery for the Global Investment Grade bonds following the high volatility of late March, when coronavirus fears peaked. However as treasury yields picked by a relatively greater amount (with the 10-year yield rising from 0.56% to 0.71%), the total index return (hedged to Australian dollars) for the month was negative at -0.74%. While the number of daily coronavirus cases in the US has started to decline, some regions, including parts of Europe are seeing second waves. However improved virus control capabilities, including better testing and tracing, have allowed implementation of more targeted countermeasures rather than complete lockdowns. Furthermore improving economic data, largely better-than-expected second quarter corporate earnings and expectations for a viable coronavirus vaccine in coming months, have all supported investor sentiment.
Activity In the primary market, we bought the attractively priced 2030 euro bonds of Danske Bank. Following a strong second quarter rebound, it has raised annual profit guidance, helped by an improving operating environment in Denmark and continuing low levels of payment moratoria. In the US dollar market, new issuance activity was unusually strong for August with around USD140bn of deals priced. We bought the attractively priced 2027 US dollar bonds of Athene, which is a lowly leveraged US life insurance company whose management has indicated a strong commitment to moving up the ratings scale. We also bought the 2027 and 2040 bonds of Royalty Pharma. We like this former High Yield credit owing to its strong commitment to stay Investment Grade rated, stable and strong free cash flows, and its very high margins of it asset-light business model which essentially revolves around purchasing pharmaceutical/ biotech product royalty streams. In the secondary market, we selectively added exposure to some BB rated credits that we like from a credit/pricing perspective. Examples of this included Netflix, the plastic packaging company Berry Global and the Dutch chemicals company OCI. On the sell side, we looked to selectively reduce exposure to higher quality US dollar issuers where valuations have approached fair value. Examples of this included Coca Cola, Texas Instrument and the municipal bonds of San Francisco. We also took profits on the euro bonds of the automaker Fiat Chrysler and the Spanish toll road operator Abertis Infraestructuras.
Performance
The Fund outperformed the benchmark over the period. In terms of ratings, there were positive contributions from being overweight in BBB rated credits and High Yield credits. Amid generally improving sentiment, the top relative return contribution came from the corporate hybrids of the German automaker Volkswagen. Emerging market issuers also performed well, including the Fund’s overweights in the Mexican miner Grupo Mexico (which is the world’s fourth largest copper miner) and the Brazilian paper company Suzano. On the negative side, our zero weight in Boeing (whose bonds recently underperform following the grounding of 737 MAX) recovered with the general risk-on sentiment and optimism surrounding successful test flights.
Outlook We remain broadly constructive on credit spreads as we get closer to the point of having a viable coronavirus vaccine, which should pave the way for further normalisation in the developed world heading into 2021. Technical factors remain supportive – we continue to see inflows into our asset class and anticipate that issuance volumes should drop from the record levels in the first half of 2020 as companies have built up sizeable cash positions as safety buffers, with cashflows also expected recover in line with business activity. Having said this, valuations have broadly discounted the fundamental improvement from the trough of the second quarter and some very defensive and highly rated areas of the market are back or close to February levels. Moreover, a number of important political risks need to be watched out for in the next few months, including the US presidential election and Brexit developments. We continue to trim high quality positions that look expensive and still see value in selective High Yield names as well as subordinated financials.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/129176-CD-Australian-Trust-Aug-20.pdfticker: ETL0132AU
commentary_block: Array
factsheet_url:
Just activity and performance
Factsheet url : https://www.aberdeenstandard.com/docs?editionId=bf650ffc-5c08-4a0a-96b9-292c490324d1
release_schedule: Monthly
asset_class: Fixed Income
asset_category: Bonds - Global
peer_benchmark: Fixed Income - Bonds - Global Index
broad_market_index: Global Aggregate Hdg Index
structure: Managed Fund