Why would you describe this strategy as a 'one to watch' and how could the strategy work in investors' portfolios?
We believe now is a good time to consider an allocation into an emerging market (EM) corporate bond strategy. We view EM as a multi-asset global opportunity set that can provide investors exposure to the sub-asset classes of investment grade, high yield and loans on a global basis, which provides investors the ability to rotate country and sector allocation depending on the economic environment of each region/sub asset class. EM corporate bonds can offer higher yields than similar-rated bonds in developed markets, which can appear compelling from a risk/reward perspective in the current low yielding environment. In addition, with fears around rising real yields and inflation making longer-dated fixed income assets less appealing from an investment perspective, the shorter duration segment of the EM corporate market can offer investors an alternative. These instruments are not generally affected by real yields and can offer investors the ability to maximise their potential returns as corporate balance sheets improve in the post-pandemic recovery.
Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
The strategy is aimed at investors looking for a higher return than available from similar duration government bonds over a 3-5-year period and who can tolerate a medium-to-high level of volatility. Its objective is to seek to protect capital and generate attractive, absolute returns through prudent investments, mainly in short duration, hard currency EM corporate bonds.
Ours is a benchmark-agnostic process based on a bottom-up, selective approach to security selection across investment grade and high yield credits. We are conviction-based investors and select credits and size positions within the framework of applicable investment guidelines and limits based on credit risk, relative value, liquidity and availability. With 30 years' expertise in high yield, we believe what differentiates us is that we apply the same high yield-style analysis to potentially attractive investment grade rated credits that require more in-depth scrutiny.
We assess the macroeconomic and geopolitical environment and the fundamentals, valuations and technicals of the asset class. We factor these into our views of which regions, countries, industries and credits may succeed more than others at a particular time and place in the credit cycle. We strive to build portfolios that are less "directional" and more resilient than the broad economic environment.
Our EM investment team is overseen by Portfolio Manager Warren Hyland who is supported by 11 analysts, specialising in the industries they cover, with an additional 5 members responsible for portfolio and risk analytics.
Can you identify a couple of key investment opportunities for your strategy you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
The reflation trade is one of our key investment themes as countries recover from the COVID-19 fallout. In this context we are taking an overweight view on cyclical investments such as Asian property and Latin American commodities. We believe the commodity sector is the ultimate reflation asset class as demand rises on the back of a pick-up in economic growth and infrastructure development, concurrent with a reduction in capital expenditure and changing dynamics from environmental, social and governance issues. While we can take some sovereign/quasi sovereign exposure in our short duration strategy, we currently see more value in maintaining the majority of our exposure in EM corporate bonds. We believe a recovery environment is positive for companies that are likely to benefit from pent-up consumer demand. We also have a favourable view on BB rated bonds where we believe the deleveraging story is likely to lead to upgrades as corporate fundamentals recover, which could likely lead to an upgrade in rating from high yield to investment grade.
Muzinich & Co. referenced herein is defined as Muzinich & Co. Limited and its affiliates. This document has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past results do not guarantee future performance. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. This document and the views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity; they are for information purposes only. Opinions and statements of financial market trends that are based on market conditions constitute our judgement as at the date of this document. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. Certain information contained in this document constitutes forward-looking statements; due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained in this document may be relied upon as a guarantee, promise, assurance or a representation as to the future. All information contained herein is believed to be accurate as of the date(s) indicated, is not complete, and is subject to change at any time. Certain information contained herein is based on data obtained from third parties and, although believed to be reliable, has not been independently verified by anyone at or affiliated with Muzinich and Co., its accuracy or completeness cannot be guaranteed. Risk management includes an effort to monitor and manage risk but does not imply low or no risk. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability; heightened pricing volatility and reduced market liquidity. Issued in the European Union by Muzinich & Co. (Dublin) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland No. 625717. Registered address: 16 Fitzwilliam Street Upper, Dublin 2, D02Y221, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom.