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Is it still time to invest in credit markets?

Published on
16 September 2019
Read time
3 minute(s) read

Investors may ask themselves whether the timing is appropriate to enter an asset class that has performed well since the beginning of the year. As concerns grow over expensive valuations and late credit cycle dynamics, versatile solutions are needed to navigate volatile credit markets.

What are our current views on credit markets?

The current environment bears similarities with the first ten months of 2018 which was an excellent time for bond-pickers. Credit markets have not been immune to financial repression and are undoubtedly expensive, yet as we are well advanced in an already very long credit cycle, we believe there is mounting risk aversion that is fuelling dispersion.

We expect this aversion to idiosyncratic risk to continue to rise, independently of monetary policy, with the frequency of credit accidents increasing, as there is no better fertilizer for defaults than abundant and cheap money. This creates increasing segmentation between what credit markets consider safe and what they consider risky.

When an issuer suddenly stops being perceived as safe (which is by no means the same thing as being safe), an overreaction can create opportunities that reward investors well in excess of the cost of risk, even in an overall expensive credit environment.

In this regard, we believe Carmignac Portfolio Unconstrained Credit to be a relevant way to access the asset class.

An unconstrained approach

An unconstrained approach's aim is to maximize returns, net of the cost of risk, through rigorous credit selection not only at any point in time but also across the credit cycle.

A large investment universe

A large investment universe allows the fund to find opportunities even when most credit markets are expensive. The Fund can find attractive idiosyncratic opportunities in investment grade, high yield, distressed corporate and structured credit across developed and emerging markets.

A flexible exposure management

The Fund has the ability to manage its beta to the asset class (reducing net exposure) thanks to a pertinent tool kit, notably credit derivatives (up to 30% of the Fund’s net assets) which allow to reduce its exposure to credit markets.

A different approach to credit markets

Traditional credit funds structurally take on too much risk when valuations are expensive and too little risk when they are cheap.

Carmignac Portfolio Unconstrained Credit seeks to do exactly the opposite, making it well suited to any environment, especially the current one.

How did the Fund fare since launch?

[Insights] 2019 09_FN_Fund_ CCR (Pro) EN
Source: Carmignac, 30/08/2019 \r\n¹75% ICE BofAML Euro Corporate Index (ER00) and 25% ICE BofAML Euro High Yield Index (HE00) calculated with coupons reinvested and rebalanced quarterly. Past performance is not necessarily indicative of future performance. The return may increase or decrease as a result of currency fluctuations. Performances are net of fees (excluding applicable entrance fee acquired to the distributor).

For more information:

CARMIGNAC PORTFOLIO UNCONSTRAINED CREDIT

Performance explanation

  • Credit markets were expensive and valuations got more and more stretched, in the context of a very liquid environment.

  • During this period, the Fund maintained a conservative positioning

  • Slight outperformance of the Fund versus its reference indicator, thanks to the performance of its core portfolio as well as its relative value strategies

  • We entered 2018 conservatively positioned as credit markets were expensive
  • In the first 10 months, an increasing risk aversion from market participants fueled dispersion which created a positive context for our Fund’s performance drivers: long idiosyncratic opportunities, structured credit, selective short via credit derivatives, etc.
  • The last two months were characterized by a liquidity crisis which led to a sharp widening of credit spreads creating very appealing risk rewards, sowing the seeds of the 2019 performance
  • Thus, the fund generated a positive performance of 1.69% over the year while our reference indicator was in negative territory

  • When spreads widened and markets offered more value in late 2018-beginning of 2019, we turned opportunistic and deployed capital in attractively priced opportunities

  • The fund also benefited from the strong performance of one our short single name position, expressed via very cheap credit derivatives

  • YTD performance stand at 19.16% versus 8.01% for the reference indicator

MAIN RISKS OF THE FUND

EQUITY: The Fund may be affected by stock price variations, the scale of which is dependent on external factors, stock trading volumes or market capitalization.
INTEREST RATE: Interest rate risk results in a decline in the net asset value in the event of changes in interest rates.
CREDIT: Credit risk is the risk that the issuer may default.
CURRENCY: Currency risk is linked to exposure to a currency other than the Fund’s valuation currency, either through direct investment or the use of forward financial instruments. The Fund presents a risk of loss of capital.

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Source: Carmignac at 30/08/2019. This document may not be reproduced, in whole or in part, without prior authorisation from the management company. This document does not constitute a subscription offer, nor does it constitute investment advice. Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor). Reference to certain securities and financial instruments is for illustrative purposes to highlight stocks that are or have been included in the portfolios of funds in the Carmignac range. This is not intended to promote direct investment in those instruments, nor does it constitute investment advice. The Management Company is not subject to prohibition on trading in these instruments prior to issuing any communication. The portfolios of Carmignac funds may change without previous notice. Carmignac Portfolio refers to the sub-funds of Carmignac Portfolio SICAV, an investment company under Luxembourg law, conforming to the UCITS Directive. The Funds are common funds in contractual form (FCP) conforming to the UCITS Directive under French law. Access to the Funds may be subject to restrictions with regard to certain persons or countries. The Funds may not be offered or sold, directly or indirectly, for the benefit or on behalf of a U.S. person, according to the definition of the US Regulation S and/or FATCA.The Funds present a risk of loss of capital. The risk, fees and ongoing charges are described in the KIIDs (Key Investor Information Document). The Funds' respective prospectuses, KIIDs, NAV and annual reports are available at www.carmignac.com, or upon request to the Management Company. The KIIDs must be made available to the subscriber prior to subscription. • In Switzerland, the Fund’s respective prospectuses, KIIDs and annual reports are available at www.carmignac.ch, or through our representative in Switzerland, CACEIS (Switzerland) S.A., Route de Signy 35, CH-1260 Nyon.The paying agent is CACEIS Bank, Paris, succursale de Nyon/Suisse, Route de Signy 35, 1260 Nyon. Carmignac Gestion - 24, place Vendôme - 75001 Paris – Tel: (+33) 01 42 86 53 35. Investment management company approved by the AMF. Public limited company with share capital of € 15,000,000 - RCS Paris B 349 501 676. Carmignac Gestion Luxembourg - City Link - 7, rue de la Chapelle - L-1325 Luxembourg – Tel: (+352) 46 70 60 1 – Subsidiary of Carmignac Gestion - Investment fund management company approved by the CSSF. Public limited company with share capital of € 23,000,000 - RC Luxembourg B 67 549.