corporate bonds
For more information visit: www.incisiveworks.com
This digital experience is an Incisive Works product © 2020 Incisive Business Media (IP) Limited
Important Information
For use by Professional and/or Qualified Investors only (not to be used with, or passed on to, retail clients). Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Your capital is at risk. For Threadneedle (Lux) sub-funds: Threadneedle (Lux) is an investment company with variable capital (Société d’investissement à capital variable, or "SICAV") formed under the laws of the Grand Duchy of Luxembourg. The SICAV issues, redeems and exchanges shares of different classes. The management company of the SICAV is Threadneedle Management Luxembourg S.A, which is advised by Threadneedle Asset Management Ltd. and/or selected sub-advisors.Certain sub-funds of the SICAV are registered in Austria, Belgium, France, Finland, Germany, Ireland, Hong Kong, Italy, Luxembourg, Macau, the Netherlands, Portugal, Singapore, Spain, Sweden, Switzerland, Denmark and the UK; however, this is subject to applicable jurisdictions and some sub-funds and/or share classes may not be available in all jurisdictions. Shares in the Funds may not be offered to the public in any other country and this document must not be issued, circulated or distributed other than in circumstances which do not constitute an offer to the public and are in accordance with applicable local legislation. Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest annual or interim reports and the applicable terms & conditions. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund and specifically this Fund. Documents other than KIIDs are available in English, French, German, Portuguese, Italian, Spanish and Dutch (no Dutch Prospectus). KIIDs are available in local languages. Threadneedle (Lux) documents can be obtained free of charge on request by writing to the management company at 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg, from International Financial Data Services (Luxembourg) S.A. at 47, avenue John F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, from JPMorgan Worldwide Securities Services, 60 Victoria Embankment, London EC4Y 0JP, or alternatively at columbiathreadneedle.com. For Threadneedle UK sub-funds: Threadneedle Investment Funds ICVC (“TIF”) is an open-ended investment company structured as an umbrella company, incorporated in England and Wales, authorised and regulated in the UK by the Financial Conduct Authority (FCA) as a UCITS scheme.Certain sub-funds of TIF are registered for public offer in Austria, Belgium, Finland, France, Germany, Hong Kong, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK. Shares in the Funds may not be offered to the public in any other country and this document must not be issued, circulated or distributed other than in circumstances which do not constitute an offer to the public and are in accordance with applicable local legislation. Threadneedle Specialist Investment Funds ICVC (“TSIF”) is an open-ended investment company structured as an umbrella company, incorporated in England and Wales, authorised and regulated in the UK by the Financial Conduct Authority (FCA) as a UCITS scheme.Certain sub-funds of TSIF are registered for public offer in Austria, Belgium, France, Germany, Hong Kong, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Singapore, Spain, Switzerland, Sweden and the UK. Shares in the Funds may not be offered to the public in any other country and this document must not be issued, circulated or distributed other than in circumstances which do not constitute an offer to the public and are in accordance with applicable local legislation.TIF and TSIF documents can be obtained free of charge on request from the Client Services Department at PO Box 10033, Chelmsford, Essex CM99 2AL, from columbiathreadneedle.com and/or Columbia Threadneedle Investments’ Client Services department PO Box 10033, Chelmsford, Essex CM99 2AL. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The mention of any specific shares or bonds should not be taken as a recommendation to deal. The fund characteristics described above are internal guidelines (rather than limits and controls). They do not form part of the fund’s objective and policy and are subject to change without notice in the future. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. This document includes forward looking statements, including projections of future economic and financial conditions. None of Columbia Threadneedle Investments, its directors, officers or employees make any representation, warranty, guaranty, or other assurance that any of these forward looking statements will prove to be accurate. Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.In the UK, issued by Threadneedle Investment Services Limited, Registered No. 3701768, and Threadneedle Asset Management Limited, Registered No. 573204. Both registered in England and Wales, Cannon Place, 78 Cannon Street London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com
IN PARTNERSHIP WITH
he Covid-19 crisis has brought a number of challenges for global credit markets. Firstly, the pandemic and lockdowns impacted the fundamental outlook for nearly all sectors and companies. Secondly, the elevated uncertainty resulted in investment
T
Weathering the storm
“Policy responses to the pandemic were effective in reducing illiquidity premia, which helped to boost IG credit issuance.”
grade (IG) markets becoming extremely illiquid. Associated wider credit spreads were an untimely tightening in financial conditions and so, thirdly, investors were forced to navigate policy responses which aimed, among other things, to keep credit channels open. Policies were effective in reducing illiquidity premia which in turn helped to boost IG credit issuance, although we have still seen a record breaking $300bn of bonds downgraded from IG this year so far.
The pandemic has forced investors to contend with all these shorter-term hurdles, as well as potentially longer-term secular changes to do with company health, employment levels, and social good/governance factors. This Spotlight guide will aim to investigate how the IG credit market has, and continues to evolve, as well as look at what the future holds for investors in the asset class.
How investment grade credit markets have coped with unprecedented economic turmoil
scroll
For Professional Clients only
t’s been a hugely challenging year for fixed income investors – unprecedented business and economic disruption, falling interest rates, rising credit risks – with a
fragile recovery evolving towards 2021 and subsequent years. The relative market calm in recent months has an uncanny quality.
Key Risks All funds: The value of investments can fall as well as rise and investors might not get back the sum originally invested. Where investments are in assets that are denominated in multiple currencies, or currencies other than your own, changes in exchange rates may affect the value of the investments. The Fund invests in securities whose value would be significantly affected if the issuer refused, was unable to or was perceived to be unable to pay. The Fund holds assets which could prove difficult to sell. The Fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities. Changes in interest rates are likely to affect the Fund’s value. In general, as interest rates rise, the price of a fixed rate bond will fall, and vice versa. Threadneedle Sterling Corporate Bond Fund, Threadneedle Sterling Short-dated Corporate Bond Fund, Threadneedle Sterling Medium and Long-Dated Corporate Bond Fund and Threadneedle (Lux) European Corporate Bond Fund only: The Fund may invest in derivatives with the aim of reducing risk or minimising the cost of transactions. Such derivative transactions may benefit or negatively affect the performance of the Fund. The Manager does not intend that such use of derivatives will affect the overall risk profile of the Fund. Threadneedle (Lux) Global Corporate Bond Fund and Threadneedle (Lux) Global Investment Grade Credit Opportunities Fund only: The Fund may enter into financial transactions with selected counterparties. Any financial difficulties arising at these counterparties could significantly affect the availability and the value of Fund assets. The Fund’s assets may sometimes be difficult to value objectively and the actual value may not be recognised until assets are sold. Leverage occurs when economic exposure through derivatives is greater than the amount invested. Such exposure, and the use of short selling techniques, may lead to the Fund suffering losses in excess of the amount it initially invested. The Fund may invest materially in derivatives. A relatively small change in the value of the underlying investment may have a much larger positive or negative impact on the value of the derivative.
Investment grade markets benefited directly from corporate bond purchase programmes. 23rd March saw the US Federal Reserve announce it would directly buy corporate bonds for the first time, which followed the Bank of England and European Central Bank’s expanded corporate quantitative easing (QE). As well as aiding large corporates in financing their operations, these programmes addressed the tighter financial conditions which were evident owing to highly elevated illiquidity premiums. In 2008, banking system deleverage amplified the shock. This time there's been forbearance on loss recognition, and on capital ratios.
Size matters
Columbia Threadneedle Investments' Alasdair Ross explains why investment grade firms have been able to weather the Covid-19 storm thanks to their operational and financial flexibility
“Strong covenant protection, asset backing and portfolio diversification – we see this as relatively cheap insurance”
Source: Columbia Threadneedle Investments, September 2020
What's viewed as acceptable is evolving ever faster. If you don't question each other constructively, you risk being left behind.
SPOTLIGHT
MENU
HIDE X
Investment grade markets benefited directly from corporate bond purchase programmes.
It was a watershed moment for everyone, including for policymakers. With Covid-19 related lockdowns, governments and policymakers acted to prevent an economic shock turning into a financial crisis. To achieve this, programmes were designed in March this year to keep the credit channel open. As well as fiscal support packages we saw support through direct lending schemes, banking sector forbearance, and expanded purchases of corporate bonds. In this respect I think we could clearly see the lessons learned from 2008 and other moments of stress such as the eurozone sovereign crisis.
Looking back over previous crises, was the global financial crisis a watershed moment for investment grade bonds and did it prepare the market for Covid-19?
What central bank action cannot do is turn unprofitable sectors or business models into profitable ones. So if you’re an airline or in certain commercial real estate sub-sectors, central bank policies focused on elevated risk premia can’t magically make those companies better. And so you will continue to get downgrades as earnings fall.
Are central banks able to save all sectors?
Central banks, in different environments, will also care about moral hazard. Just because you’ve got the central bank buying bonds, it doesn’t mean spreads can’t widen. That can give good information to the economy.
So it’s not that central banks won’t ever allow spreads to widen; they will. But we think that now with these tools, the deleverage unwind and elevated illiquidity premia that you saw in early-2009, and also that you saw in March this year before the Fed stepped in, are unlikely to be repeated in the near term.
When there is a crisis, access to debt capital is cut off and corporate treasury teams become rightly concerned. Then there is a period where companies will focus on balance sheet repair. This might include cutting capex and using cashflow to deleverage, or perhaps inorganic actions such as selling assets, cutting dividends and buybacks, or raising equity. The aim is to address that lack of access to credit and ensure ongoing financeability of the enterprise.
How do corporate treasury teams typically respond to such crises and have they learned lessons from 2008?
There’s an economic effect of that to the credit cycle. As things free up again and credit flows, you tend to get subsequently increasing capex, debt levels and growth in an expansion phase. Coming into 2020, it had been one of the longest expansion phases we have seen, as ever loosening monetary policy had worked to extend the growth cycle. Because of that growth and low levels of interest rates, companies had been gearing up, so you had corporate leverage actually relatively high going into the pandemic.
So perhaps you could argue the lessons of 2008 were less fresh in the mind of corporate management teams than they were on the policymaking side. Having said that, following the Covid-19 shock many IG corporates have acted to defend credit quality.
I think for IG, you’re going to see a spike in leverage, but one of the characteristics of an IG company – by definition – is the mix of scale, operational and financial flexibility and discretionary cashflow that allows them to rebuild credit quality. We are likely to see husbanding of cashflows, building of cash balances, and ultimately debt paydown and deleverage. We’ll go through the cycle again.
It’s worth noting that in contrast to generally higher corporate leverage the banking sector had significantly better credit quality coming into the pandemic than into previous crises. Banks were better capitalised, more liquid, and more tightly regulated in 2020 than 2008. Asset quality will deteriorate as loans become non-performing but the sector has better ability to withstand those losses.
US Industrial Universe - Gross, Net & PENSION-ADJUSTED Leverage
On the operational side, if you’re an airline, retailer or in the leisure or oil and gas sectors, the outlook could potentially be quite tough. But the way we think about it is that in every sector there are going to be companies that have the ability to pull levers to address that earnings decline and leverage. They’ll cut dividends, cut buybacks, and divert cashflow to the balance sheet.
Which sectors are struggling most and are the IG players in those sectors immune to downturn because of their scale?
For an IG company, if you start off at 2x leveraged and you go up to 3x, you’ve got a chance to get back to 2x. It’s much more difficult if you start off at 4x or 5x leveraged. When you end up 8x or 9x leveraged, you might have no chance of navigating back and you have to restructure. The operational and financial flexibility combined with less leveraged capital structures affords an inherent resilience to much of IG. Obviously, some sub-sectors that are typically very small in IG – for example airlines represent around 0.4% of the global IG market – face potentially deeper issues.
If you’re an airline, retailer, or in the leisure or oil and gas sectors, the outlook could potentially be quite tough.
When we think of corporates and deleveraging, there are some companies out there where the pandemic doesn’t really affect them, such as in healthcare. Then you’ve got some sectors where the pandemic has actually improved ability to deleverage.
How are IG businesses responding to the crisis and what tools do they have at their disposal?
An example might include a name such as Kraft Heinz in the consumer products space given more people are eating at home and buying branded foods. And then there’s the majority of companies in IG that are impacted but can adjust their operating model, adjust their financial profile and cash policy, take a short-term increase in leverage, but work to rebuild credit quality in future years.
Certainly in the banking sector there could be consolidation. You have forbearance on losses and capital ratios are OK. However, the private sector doesn’t have a huge demand for credit and at the same time, with very low rates, net interest margins are weak. Therefore, that sector really struggles to earn its cost of capital. So we’d expect to see consolidation. The aim of that is to take out costs and to improve capital positions where possible. We’ve recently seen the Caixa and Bankia merger in Spain, and prior to that there was the Intesa and UBI merger in Italy. We’d certainly expect that to continue.
For the more problematic sectors, such as real estate, it might be an inorganic method that you use to try and save your business, such as asset sales or rights issue, rather than M&A. We’ve seen this recently with both Hammerson and Unibail-Rodamco-Westfield.
Could we see some consolidation?
We build credit portfolios based on high-quality, bottom-up, fundamental issuer research. We want to get the right credit risks, issuers and securities in the portfolio. And we want the sum of these issuers to give us industry exposure consistent with our views. We’re not running big top-down views, it’s very much bottom-up. We have a strong focus on managing the downside. Our portfolios are typically quite defensive and resilient. If you look at the Covid crisis this year, you’ll see that portfolios outperformed through the weakness.
Within credit funds focused on issuer and security selection there are still higher-level risk factors that you need to manage at the same time. Obviously, interest rate risk would be one of those. Typically, we don’t take big interest rate risk positions.
How have your funds reacted to the crisis?
We control overall portfolio spread risk through a market beta measured by duration times spread. We control this carefully because we want issuer and security selection to drive risk and return in the portfolio. However we will adjust it given market opportunity, for example we increased beta in March given the spread levels on offer. The earnings outlook was poor and uncertain.
But buying the asset class and getting longer spread risk in March and April was, in our view, about being long the policy response as much as being long the longer-term resilience of IG companies and so we moved the risk up in the portfolios. We continued to run industry overweights in sectors where there is earnings stability and visibility, such as utilities, food and beverage, and technology.
There were a lot of opportunities back in April where company spreads had widened, but the outlook for those companies was in fact better. A good example was technology datacentre company Digital Realty. As the world moved towards working from home the fundamental outlook for the company continued to improve. Indeed, by the end of March the equity price was higher on the year and yet 10y bonds were around +150bp wider delivering over -10% of excess returns.
The majority of companies in investment grade credit are impacted, but can adjust their operating model, financial profile and cash policy, take a short-term increase in leverage, and work to rebuild credit quality in the future.
Fidelity National Information Services, Inc. (FIS)
Source: Columbia Threadneedle Investments, DS Smith PLC, 2019/2020 Full Year Results, 2 July 2020.
In early 2019, FIS agreed to acquire Worldpay (WP) and by doing so more deeply entered the merchant acquiring business. It has positioned itself as a key competitor in the maturing payment processing business and will use free cashflow and synergies to reduce debt back to levels commensurate with mid-to-high BBB levels.
While the pandemic has impacted short-term transaction volume down, FIS continues enabling digital transformation for its bank customers while branches are inaccessible. Simultaneously, FIS is enabling e-com/omni experiences for its merchant customers. The resulting effect is FIS technology increasing importance to its clients as customers seek to adjust to a post-pandemic normal.
CSX Corporation
CSX is a rail transportation and real estate company in North America. Established in 1980, the company’s primary freight rail business, CSX Transportation, operates mainly in the eastern US and parts of Canada.
Bacardi
The largest privately-held, family-owned spirits company in the world, Bacardi, headquartered in Bermuda for 55 years, has a portfolio of over 200 brands. The company’s strong portfolio of spirits maintain leading shares within their respective categories and have generated stable free cashflow. In 2018, Bacardi issued $2.6bn to fund the acquisition of the stake in Patron Tequila that it didn’t already own.
DS Smith is the largest dedicated European recycled packaging company, servicing exporting manufacturers, fast-moving consumer goods companies (FMCG) and, increasingly importantly, e-commerce companies.
DS Smith PLC
Click on the sections for more information
It has been a consolidator in the fragmented packaging sector, benefiting from advanced technology that allowed it to gain market share amongst FMCG & e-commerce customers.
Making the grade
A snapshot of some investment grade firms impacted by the pandemic and how they have reacted
The industry has been going through wholesale restructuring, with increased efficiency leading to significant cost savings and increased cash generation capacity. CSX has been at the forefront of this transformation.
Source: Columbia Threadneedle Investments.
Source: Columbia Threadneedle Investments, CSX Corporation Annual Report 2019.
Source: Columbia Threadneedle Investments, FIS annual report 2019, Q2 report 2020.
Please note the mention of any specific shares or bonds should not be taken as a recommendation to deal. Columbia Threadneedle Investments does not give any investment advice.
Debt reduction = EBITDA growth + debt paydown means achieving 2.7x leverage target early 2021
Covid-19 accelerates secular tailwinds of cash – card transactions. Expanded WP synergies by over $100m. More than $300m of short-term cost reduction plans, including cutting bonuses and restricting travel. Capital allocation policy remained focused on deleveraging and preserving liquidity. Large recurring revenue base allowed the company to maintain current capex plans.
Pre-Covid-19 expectations
Management’s Covid-19 strategy
• • • • •
Achieve leverage target in late 2021
Covid-19 impact metrics
2020e Revenue growth
+22%
+21%
Revenue
$11.9bn
Measures to conserve cash, including a pause in buybacks, which saved $600m vs previous expectations. Resulted in credit metrics remaining unchanged in Q2, with leverage at 2.4x in the face of a 23% fall in earnings. As business returns, cash generation will continue and credit metrics will remain in their target range.
• • •
EBITDA
$5.8bn
Leverage (at the upper end of the 2.5x target range)
2.4x
Revenue: quarter-on-quarter
21%
Leverage
EBITDA: quarter-on-quarter
23%
Revenue: Private
Approx. leverage
4.5x
EBITDA: Private
4x
Ringfenced expenses by market and selling channel in order to right size expenses quickly to revenue opportunities. Moved quickly to a more focused, prioritized and dynamic resource allocation approach which has seen them gain share in key markets over the past six months. Leverage likely to continue to fall, albeit at a reduced pace than the pre-Covid-19 rate.
Pre-Covid-19 metrics (FY19)
Covid-19 impact metrics (Qtr ending June ‘20)
£6.0bn
Leverage (target is to reduce net leverage to below 2x)
2.1x
£660m
Revenue:
£5.8bn
2.5x
EBITDA:
£500m
Immediate deferral of dividend, which helped reduce capex by 20%. Further sales of southern European paper capacity are also being considered, while improvements have been seen in US business. Cost-cutting programme and strong demand from e-commerce and FMCG means DS Smith is expected to generate over £650m of EBITA in 2022, resulting in net leverage returning to pre-Covid-19 level of 2.1x.
Pre-Covid-19 metrics
After the storm
The coming year should see investment grade firms pick up the pieces after a tumultuous 12 months
We shouldn't underestimate the fact that the pandemic may have changed behaviour in significant ways.
We’ve worked for years to integrate ESG risk analysis and fixed income credit analysis
Source: *Columbia Threadneedle Investments.
Warehouses and logistics have benefited from home delivery and the Amazon effect.
Alasdair Ross, Head of IG Credit at Columbia Threadneedle, says that while there might be some defaults or downgrades, it shouldn’t be a major concern as a result of the makeup of the market. “If you think about IG markets, the biggest single sector is banks – and that is supported by a policy to manage losses. We’d expect credit quality to go sideways and weaker players will be encouraged to merge with stronger ones. That’s almost 25% of the global IG market.”
Defying defaults
Throughout the pandemic, government support has helped many of these businesses cope with the dramatic fall in revenue. Furlough schemes have staved off mass redundancies and state-backed loans have propped up balance sheets. But as these schemes wind down, how will the firms that make up IG credit markets cope? Could there be a series of defaults and downgrades amongst some of the market’s leading lights?
others have emerged stronger.
t’s fair to say 2020 has been a year of considerable turmoil that few observers would have predicted. While the Covid-19 pandemic has caused mayhem across global markets and challenged the balance sheets of some previously solid businesses,
I
“Then you've got sectors where actually the outlook is as good if not better than before, such as technology and food & beverage, which is 10% of the market. Largely unaffected sectors, such as utilities, telecoms and healthcare, add up to another 20% of the market.”
Other industries that on the surface appear to have been badly hit by the pandemic have seen some bright spots. “Take real estate, which is 4% of the market but isn’t really a homogenous sector as there are so many different sub-sectors,” adds Ross. “Warehouses and logistics have benefited from home delivery and the Amazon effect. Obviously if you’re in retail or offices then the outlook is more difficult, but by now you are down to only 1% or so of the market.”
“Even for sectors where the pandemic has negatively affected operations and earnings, many IG-rated companies have significant levers they can pull in order to react to that. A combination of cost-cutting, capex phasing, working capital management and inorganic activity such as asset sales, dividend cuts or equity raises can and will be utilised to defend balance sheet credit quality. IG ratings are based on a combination of strong market positions, diversified operations, and resilient balance sheets and this combination is what gives many IG companies the flexibility to adapt where required”.
While much hope is being placed on a vaccine allowing businesses to get back to normal, Ross cautions that other factors might have a lasting effect on how they operate. “We shouldn’t underestimate the fact that the pandemic may have changed behaviour in significant ways,” he says. “Will we all go back to five days in the office or is home-working here to stay to some degree? Some sectors may benefit from these behavioural changes, like technology or food and beverage. However, it might put a question mark over the outlook and the business model of others.”
A post-pandemic bull market?
At the same time, many global businesses have been bolstered by a policy response that has impressed many observers by its speed, scale and scope. With policymakers wanting to avoid an economic shock turning into a financial crisis, many of the support measures have specifically targeted keeping the credit channel open.
While the policy response to the crisis in many countries has been widely praised for the speed at which it was deployed, easing economies off state-support might prove less rapid. “One thing we expect concerning policy tools is that typically they go on quicker than they come off,” explains Ross. “The European Central Bank’s corporate QE lasted much longer than was strictly necessary for market stress or for cost of debt of large European corporates. More recently we’ve seen the US Federal Reserve saying it would move to average inflation targeting, where even if inflation goes above 2%, interest rates won’t be increased until we’re above 2% for some time. So we expect this policy support to last for longer than it might be needed.”
“Inflationary pressure is unlikely to emerge anytime soon for the market,” adds Ross, despite what many observers predict. “Ever since 2009, when we've had loose monetary policy and then these extraordinary tools being used, such as yield curve control, QE, and direct buying of corporate bonds,” Ross points out. “People have always talked about how it’s surely going to be inflationary at some point and it hasn’t.”
corporate health: the start of a new credit cycle?*
• • • •
Survival bias for companies Focus on strengthening balance sheet Equity issuance, bond buybacks Corporate bond spreads begin to tighten
Corp bonds > Equity
Economic downturn or recession Falling asset prices, rising defaults Equity prices falling, corporate bonds spreads widening
Bad for both Equity & Corp bonds
Cashflow, margins and profits increasing Corporate leverage falling Corporate bond spreads tightening, equities start to rally
Good for Equity & Corp bonds
Earnings positive but leverage elevated More risky corporate behavior (leverage increased, share buybacks, M&A etc) Equity prices go up, corporate bond spreads start to widen
Equity > Corp bonds
Falling leverage
Rising leverage
Low growth
High growth
Certain large cap BBBs (T, VZ, GE, ABIBB, CVS, KHC)
IG Corporates
Basic materials
1. Recovery
4. Repair
2. Expansion
3. Downturn
The IG market is currently offering investors decent value, adds Ross. “The spreads on IG globally are at 130 basis points over government bonds, which is at the long-run average. Yield levels on government bonds and cash rates are at all-time lows, and P/E ratios in the equity markets were at two-decade highs because discount rates were so low. In that context an asset at long run average valuations – the credit spread – is not bad value.”
Cause of optimism
Many firms have issued debt to sustain themselves through the crisis and this is likely to continue in the coming months, with companies accepting further government liquidity support. Despite this, many firms have cut dividend payments and abandoned share buybacks, which is credit supportive.
And the nature of IG firms means that sentiment is possibly even better now than at the beginning of 2020, explains Ross. “The combination of policy factors and the fact that this asset class can deleverage – and management teams will try to deleverage – makes us quite positive for the future. More positive today than we were coming into the year.
The combination of policy factors and the fact that this asset class can deleverage makes us quite positive for the future. More so than we were coming into the year.
But with debt rocketing, GDP damaged, and business models threatened, are we entering a fragile, looking-glass world?
nvestment markets, turned upside down by Covid-19 in March this year, are being helped back towards pre-crisis levels by government support and monetary easing.
Click on each segment to reveal more
Investment Grade Credit at Columbia Threadneedle Investments
A collaborative, interactive environment between credit analysts and portfolio managers ensures the best ideas are incorporated into portfolios. Our credit process draws on idea generation from across our Global Fixed Income team, as well as research analysts in our Responsible Investment team and Equity teams.
Meet the managers
Alasdair Ross Head of Investment Grade Credit
Ryan Staszewski Senior Portfolio Manager, Investment Grade Credit
John Hampton Senior Portfolio Manager, Investment Grade Credit
Alasdair is Head of Investment Grade Credit, EMEA. Alasdair is lead portfolio manager across various global, euro and sterling corporate credit portfolios including Threadneedle (Lux) Global Corporate Bond Fund, Threadneedle (Lux) European Corporate Bond Fund, Threadneedle UK Corporate Bond Fund, and is also co-manager on the Threadneedle Credit Opportunities Fund. Between joining the company in 2003 and becoming a portfolio manager in 2007,
Ryan is a senior portfolio manager at Columbia Threadneedle Investments with responsibility for European and global credit portfolios within the fixed income team in London. Prior to joining the company in 2012, Ryan held roles as a credit analyst at JP Morgan and Aviva Investors. He received a degree in Economics and Finance from Curtin University, Western Australia, and also holds the Chartered Financial Analyst designation.
Click on the below icons for details
We build credit portfolios based on high-quality, bottom-up, fundamental issuer research. We want to get the right credit risks, issuers and securities in the portfolio, and we want the sum of these issuers to give us industry exposure consistent with our views. We’re not running big top-down views, it’s very much bottom-up. We have a strong focus on managing the downside. Our portfolios are typically quite defensive and resilient. If you look at the Covid-19 crisis this year, you’ll see that portfolios outperformed through the weakness.
Within the global credit team, research analysts are dedicated solely to investment grade or high yield credit issuer analysis. We believe this model allows our research experts to have greater focus.
Our credit analysts produce forward-looking, independent credit ratings and recommendations. Additionally, we embed downside risk management in our proprietary research where the analysts supplement these opinions with a risk rating for each issuer – which is a measure of the company’s durability.
Our proprietary risk rating system enables analysts to efficiently communicate an issuer’s risk profile and supports rigorous cross-industry relative value debates that help the portfolio managers to determine their final portfolio positions.
Our approach is anchored by three key principles – fundamental research, global collaboration and downside risk management. We remain focused on issuer and security selection – where there is a higher probability of success – to drive strong, consistent risk-adjusted returns.
analysts and infrastructure, while enabling us to extract value from security selection in portfolio construction.
ith around £45 billion* of assets managed by our global credit team, Columbia Threadneedle is neither ‘boutique’ nor ‘behemoth’. Our scale affords us the scope to resource a suitably sized team of experienced
W
Performance shown is the Threadneedle (Lux) European Corporate Bond Fund from launch 21 September 2018 to 30 September 2020, and the Threadneedle European Corporate Bond Fund (a UK authorised UCITS fund which merged into Threadneedle (Lux) European Corporate Bond Fund 22 September 2018) prior to that. The past performance calculated before 21 September 2018 includes UK taxes but does not include Luxembourg taxes. Returns shown are gross and do not include any associated fund fees or reinvested income. Returns are calculated in Factset using daily official Global Close valuations and daily cash flow. Past performance is not a guide to future performance.
Click on one of the below for details
Threadneedle (Lux) & Sterling FUNDS
• Threadneedle (Lux) European Corporate Bond Fund
• Threadneedle (Lux) Global Investment Grade Credit Opportunities Fund
• Threadneedle (Lux) Global Corporate Bond Fund
• Threadneedle Sterling Corporate Bond Fund
• Threadneedle Sterling Short-Dated Corporate Bond Fund
• Threadneedle Sterling Medium and Long-Dated Corporate Bond Fund
5y cumulative performance (%)
Threadneedle (Lux) European Corporate Bond Fund*
An active bond fund that focuses on issuer and security selection to exploit opportunities primarily in the European investment grade corporate bond market.
Calendar year performance (gross, EUR, %)
Threadneedle (Lux) European Corporate Bond Fund vs Index
Source: *Columbia Threadneedle Investments as at 30 September 2020.
Source: *Columbia Threadneedle Investments cumulative, gross returns in EUR as at 30 September 2020, based on LU1849561870 share class. **The Threadneedle European Corporate Bond Fund (a UK authorised UCITS fund launched on 22 October 2002) which merged into this Fund on 22 September 2018.
Please note the fund is not managed against a benchmark and this comparator is shown for illustrative purposes only. Returns shown are gross and do not include any associated fund fees or reinvested income. Returns are calculated in Factset using daily official Global Close valuations and daily cash flow. Past performance is not a guide to future performance.
Source: Columbia Threadneedle Investments cumulative, gross returns in EUR since launch 31 March 2018 to 30 September 2020, based on LU1746310694 share class.
An active, absolute return credit fund that seeks to deliver positive returns through the cycle by investing in investment grade bonds globally.
Since launch cumulative performance (%)
Threadneedle (Lux) Global Investment Grade Credit Opportunities Fund vs Index
Threadneedle (Lux) Global Investment Grade Credit Opportunities Fund
Returns shown are gross and do not include any associated fund fees or reinvested income. Returns are calculated in Factset using daily official Global Close valuations and daily cash flow. Index is Barclays Capital Gross Aggregate Corporate Index - USD Hedged. Past performance is not a guide to future performance.
Source: Columbia Threadneedle Investments cumulative, gross returns in USD as at 30 September 2020, based on LU1062005217 share class.
An active investment grade bond fund that focuses on issuer and security selection to exploit opportunities in the global investment grade corporate bond market.
Threadneedle (Lux) Global Corporate Bond Fund vs Index
Calendar year performance (gross, USD, %)
Threadneedle (Lux) Global Corporate Bond Fund
Returns shown are gross and do not include any associated fund fees or reinvested income. Returns are calculated in Factset using daily official Global Close valuations and daily cash flow. Past performance is not a guide to future performance.
Source: Columbia Threadneedle Investments cumulative, gross returns in GBP as at 30 September 2020, based on GB0001451508 share class.
An active bond fund that focuses on issuer and security selection to exploit opportunities primarily in the UK investment grade corporate bond market.
Threadneedle Sterling Corporate Bond vs Index and Sector
Calendar year performance (gross, GBP, %)
Threadneedle Sterling Corporate Bond Fund
Subscriptions to a Fund may only be made on the basis of the current Prospectus and the Key Investor Information Document, as well as the latest reports available free of charge on our website. Please refer to the ‘Risk Factors’ section of the Prospectus for all risks applicable to investing in any fund.
Source: Columbia Threadneedle Investments cumulative, gross returns in GBP as at 30 September 2020, based on GB00BD8GMB57 share class.
An active bond fund that focuses on issuer and security selection to exploit opportunities primarily in UK investment grade corporate bonds with an effective maturity of 5 years or less.
Threadneedle Sterling Short-Dated Corporate Bond vs Index
Threadneedle Sterling Short-Dated Corporate Bond Fund
Source: Columbia Threadneedle Investments cumulative returns, gross of fees in GBP as at 30 September 2020, based on GB00BD8GM715 share class.
An active bond fund that focuses on issuer and security selection to exploit opportunities primarily in UK investment grade corporate bonds with a remaining maturity of 5 years or more.
Threadneedle Sterling Medium and Long-Dated Corporate Bond vs Index
Threadneedle Sterling Medium and Long-Dated Corporate Bond Fund
Columbia Threadneedle fosters a collaborative, interactive environment for all the best investment ideas to flow. Portfolio managers and credit research analysts work together on investment decision-making and portfolio construction and employ a disciplined structure and repeatable process. The whole team shares a common objective – the delivery of superior risk-adjusted returns for their clients. The team also benefits from being part of a leading global asset manager.
The firm’s credit process draws on idea generation from across the Global Fixed Income team and wider investment platform and includes collaboration with analysts in the Responsible Investment team and Equity teams. For example, the teams share meetings with companies, enabling them to meet management more often at a senior level than if they took a ‘fixed income alone’ approach.
Global insights, local decisions, better outcomes for clients
A collaborative, interactive environment between credit analysts and portfolio managers ensures the best ideas are incorporated into portfolios.
Our credit process draws on idea generation from across our Global Fixed Income team, as well as research analysts in our Responsible Investment and Equity teams.
he was a credit analyst responsible for covering the TMT, utility and energy sectors, as well as the sterling whole business securitisation sector. Prior to joining the company, Alasdair worked at BP plc in a rotation of commercial roles. Alasdair has a first class honours degree in Politics, Philosophy and Economics from the University of Oxford. He also holds the Chartered Financial Analyst designation.
of Aviva Investors and Friends Life Investments Corporate Bond teams. At Aviva Investors, he managed investment grade portfolios that spanned both Aviva & Friends Life client bases. Prior to this John was Head of Credit at Friends Life Investments and held similar senior roles at Liverpool Victoria Asset Management. John has a degree in Mathematics from the London Metropolitan University.
John joined the company in 2016 as a Senior Investment Grade Insurance Portfolio Manager. Based in London, John is responsible for managing investment grade credit portfolios for Columbia Threadneedle Investments’ European insurance clients and works with the Global Insurance team to develop its proposition and grow its assets under management. John joined from Aviva Investors where he was Head of Sterling Investment Grade Credit and led the integration
