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?
Mirabaud Sustainable Global Strategic Bond follows a high-conviction, go-anywhere approach that aims to achieve an attractive total return through the cycle with a high level of current income combined with long-term capital appreciation.
The strategy is unconstrained, so can seek out the best opportunities in fixed income wherever we are in the business cycle, blending exposures to government bonds, investment grade corporates, high yield and emerging markets to maximise return potential while limiting volatility.
We start with top-down analysis to set our allocations across the different asset classes, geographies and sectors, and then we populate those from the bottom-up, leveraging the team's extensive credit expertise to identify the strongest opportunities.
Dynamism is a key element of the strategy - we believe being quick to respond to change is critical and we constantly adjust credit and duration risk to optimise returns. The integration of ESG and extra-financial considerations into financial analysis is key to the understanding of risks and long-term opportunities.
The strategy has been managed by Andrew Lake, Fatima Luis and myself for the past 10 years, but benefits from the credit expertise of the full fixed income team. We all sit together in one location in one time zone, which enhances knowledge share, idea generation and a culture of debate.
How are you currently positioning your portfolio?
Our current positioning has a strong quality bias - so this means a high allocation to government bonds, investment grade and the majority of our high yield exposure is focused on the top tier of BBs. There is a great amount of uncertainty and debate on the economic fallout following 2 years of central banks tightening policy, but the signs are there that even in a "soft landing" scenario we will still see slower growth. When you combine this with increasing interest costs as companies refinance debt into the new high interest rate environment, then we are likely to see a broad-based deterioration in credit metrics and difficulties for those companies with high leverage, highly cyclical end markets or a lack of operational agility. By focusing on the high end, we aim to protect portfolios from any shift towards a "hard landing", whilst still earning the highest yields were have seen for the past 10 years.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
We like the opportunity in long-dated European investment grade bonds, where there are several factors at work. We feel that the European economic cycle will be shorter than in the US, due to a greater reliance on exports and different labour dynamics across the region, leading to the ECB being the first major central bank to cut interest rates in 2024. This should create a tailwind for government bonds - but also for high-quality investment grade where default risk is very low as companies responded to Covid by conservatively managing their balance sheets and having a greater focus on leverage and cashflow generation. The level of carry is appealing - as credit spreads are above their long-term averages, compensating for some of the recession risk and giving a higher level of income than just government bonds, plus the higher interest rate environment means coupons have returned. Finally - the power of duration and convexity: many long dated bonds issued over the previous 5 years had low coupons and now trade at significantly discounted cash prices. As the interest rate cycle turns, these bonds should start to pull to par giving price upside as well as yield.
Al Cattermole is Portfolio Manager for Mirabaud Sustainable Global Strategic Bond
