Investment Strategies
Steering A Careful Course Around Credit Amid Volatile Times
We talk about rising rates, hot inflation, Russia and much else with a senior figure at an asset management house overseeing more than $500 billion of assets.
This news service recently spoke to Henrietta Pacquement, head of
the global fixed income team at Allspring
Global Investments, a firm running more than $500 billion of
assets for retail and institutional clients.
Pacquement joined Allspring from its predecessor firm, Wells
Fargo Asset Management, taking on the role of quantitative
analyst before becoming portfolio manager and then head of the
European investment grade business for Credit Europe in London.
She has also worked in Paris at AXA Investment Management in a
similar role. She earned a master’s degree in astrophysics from
Cambridge University. She has earned the right to use the
Chartered Financial Analyst® (CFA®) designation.
What is your view about investment grade credit in the
current market environment (rising rates and inflation,
post-Covid disruptions, the impact of the Ukraine crisis, and
recovery, new sectors)?
Pacquement: In the current market environment, we see the
existing labour market pressures and supply chain bottlenecks
persisting with the risk for inflation on the upside.
In terms of the investment grade credit faced vis-a-vis the
conflict in the Ukraine, whilst liquidity in names with exposure
to the region have been challenged, wider liquidity has remained
reasonable with two trading and the secondary market operating as
normal, albeit at lower volumes. Primary market activity has
certainly been more muted (more so in Europe than in the US) but
issuers have still been able to tap primary markets where
necessary. Year-to-date issuance for euro investment grade
corporates (as measured by Deutsche Bank) is just over €50
billion, down 8 per cent year-on-year versus 2021.
We are overweight credit spread, given that spreads are now back
to levels not seen since the end of 2018. We are neutral interest
rate duration.
We have become increasingly selective when participating in
primary markets. New Issue Concessions (NICs) have widened out
recently (to 30bps+) as volatility has returned to the market and
should be a source of returns as activity picks up. However, we
don’t see a return to the bonanza that appeared amidst the Covid
pandemic as credits are still awash with cash – that said stock
buybacks are being kicked into the second half of this year.
(Editor: new-issue concession is a term explaining the
difference between the extra yield, or spread, investors demand
to buy new bonds over US Treasuries and the spread on the
company's existing bonds of a similar maturity just before the
new bond sale is announced.)
We are overweight BBBs and BBs as credit fundamentals remain
favourable. However, we are not planning to increase the
allocation to these rating buckets. In recent months, we
have built a cash buffer – which we will consider deploying as
the market becomes more dislocated and opportunities present
themselves.
Given how bond yields have been squeezed so hard over the
past decade, forcing investors to re-think asset allocation,
where does credit now sit in portfolios? Does the likelihood of
changes to central bank policy, with energy prices shooting up,
create new challenges?
The impact of the Ukraine/Russia conflict will continue to put
upside pressure on inflation which was already elevated following
the post-Covid re-opening. Rising energy and commodity prices
could in turn have a negative impact on longer-term growth.
This puts further pressure on central banks to be calculated and
data-dependent as they seek to normalise monetary policy. We have
already seen a moderation in the tightening schedule by the US
Fed in March, moving by 25bps instead of the expected 50bps.
The prospect for investment grade credit this year appears
positive as valuations look cheap to long term averages. The
fundamental picture also looks supportive as the interest of
creditors and shareholders are well balanced.
What are the most promising areas of credit, in terms of
expected returns, and what are you steering clear
of?
In terms of sectors, we currently favour real estate and
telecommunications. Following the recently sell-off, selected
corporate hybrids look attractive from a yield perspective.
We are underweight cyclicals and sectors that are energy
intensive/dependent on commodities markets.
Have you had to adjust your exposures as a direct result
of the Ukraine crisis? Have there been foreign exchange issues to
take account of?
Our credit portfolios do not directly own any Russian or
Ukrainian corporates or banks, nor do we own any local/hard
currency Russian/Ukrainian sovereign debt. We have limited
exposure to corporate credits with exposure to the region.
Do you operate in the credit default swaps market to take
positions on a basket of credits? Do you operate through
derivatives at all?
We use credit default swaps on individual names and indices
intermittently but generally favour cash bonds over synthetics.