Acting with conviction: investment grade

Neil Mehta, Portfolio Manager highlights the key drivers behind the team’s strong alpha generation, how learning from mistakes is a defining factor in their success, and the current opportunities in an ever-evolving landscape.

Being right when others are wrong

We established ourselves as one of Europe’s first specialist alternative credit managers in 2001 and have been investing in investment grade debt since 2003, when we started running European corporate portfolios.

Over that time, we’ve embraced a truly active mindset, unlike many of our benchmark-hugging peers. We’re not afraid of backing our investment convictions in size, for example, leveraging Euribor futures to express rates views in the Eurozone, or utilising BTP futures to execute a spread trade on Italian sovereign risk. However, a prudent risk framework goes hand-in-hand with our strong focus on alpha generation.

Politics and policy

We also differentiate ourselves through our experience as a team in analysing political events and policy trends. This has proved crucial since the fund was launched in 2010, particularly in the Eurozone, where market volatility has often gone hand-in-hand with populist upheavals and unconventional monetary policies.

The key is to access and leverage the best quality information, and we think this is best done via a combination of proprietary research, the use of alternative media, and direct dialogue with policymakers. This formula has held us in good stead over the years, particularly in a world where information is everywhere and listening to the wrong voices can be expensive.

Our market-leading performance through multiple cycles is testament to the success of our approach and process.

A culture of continuous learning


Making mistakes or being incorrect is part and parcel of being a risk taker. In fact, having a mindset that focuses the downside risks associated with trades keeps us more alert and ready to act if necessary.

When we think about ‘biggest mistake’, it is probably not foreseeing the cascading impact of lockdowns in early 2020. Despite having a robust risk management framework in place, extreme market scenarios can place unprecedented pressure on portfolio construction. We suffered a large drawdown that March as liquidity dried up, and we were left holding risky positions such as Greek government bonds and the Norwegian krone (versus the euro).

By mid-March we were confident that a policy response was in the offing from the ECB, and indeed it initiated the pandemic emergency purchase programme (“PEPP). However, mark-to-market losses and risk controls meant that we were unable to increase the positions in the way we wanted. We ended the year outperforming the benchmark, but performance could have been stronger if not for the missed opportunity.


The ingredients of a successful trade

We positioned our European aggregate strategy underweight French government bonds earlier this year as the debt metrics didn’t stack up when we did our proprietary analysis. We were unsure on the exact timing but were confident that at some point later in 2024, the market, EU and rating agencies were going to start putting more pressure on France to consolidate its finances. As it happened, the EU elections proved to be the trigger for a subsequent snap election and the catalyst for market reaction.

While we had the right trade on, in hindsight, our timing was too early, and the size of the position wasn’t nearly aggressive enough to have a material impact on fund performance. It was a lesson that, despite making the right call, factors such as timing and position size are just as important ingredients in a successful trade.

An ever-evolving landscape

When looking at changes in the industry over time, it is worth pointing out:

• Market volatility episodes are much shorter in duration, limiting the window of opportunity to take advantage of large market movements. This is most likely due to the continued rise of often unsophisticated data-driven strategies and retail investing, but also the difficulty in interpreting economic data in a post-pandemic setting. For investors, there is less room for complacency, and portfolio construction is important in order to be pre-positioned into risk events.
• It has become more difficult to separate signal from noise from an information standpoint. We live in a world where mobile phones are constantly pinging the latest news stories, tweets, and messages, and this information overload can ultimately be detrimental to an investment thesis if the wrong information is followed.
• Macro in the broadest sense, i.e. combining top-down structural economic shifts, a higher inflationary environment with bottom-up microanalysis of countries, regions and geopolitics is much more volatile and more of a moving force than, for example, ten years ago. This opens more opportunities on the long and short side of investing or being overweight/underweight in reference to benchmark strategies.

Where we see opportunities

While we are unable to provide investment advice, over a longer horizon, we believe that there is still plenty of return to be extracted from investing in EUR-denominated sovereign credits, where fundamentals are on an improving trajectory.

We particularly like Romania and Mexico, both IG-rated with relatively low debt-to-GDP ratios. Both offer yields more than 5%, a full 200bps over France, for example¹. Our team visited Romania late last year and the feedback was generally positive on the political front, albeit there are risks on the fiscal consolidation side. However, strong support from the EU and the attractive valuation tilts the risk-reward in favour of a core holding.

On the rates side, our views are largely shaped by how we view macro in a post-pandemic world i.e. stickier inflation, large fiscal deficits, rising populism, de-globalisation, and geopolitical uncertainty. This will likely keep long-term yields elevated in the foreseeable future and limit how much central banks loosen monetary policy. In that respect, we are still excited about curve ‘steepeners’ (buy short maturity bonds/sell long maturity bonds) as central banks adjust interest rates late as we move into the latter stages of the cycle.

^{1 Bloomberg.}