Carmignac’s Charles Zerah is buying up subordinated bank bonds and European collateralised loan obligations, despite the latter being an arguably ‘broken asset class’, the Citywire A-rated manager has said.
In an investment update, Zerah, who runs the Carmignac Portfolio Global Bond fund, said he has benefited from his exposure to European banks over the past five years and the supportive environment remains in place.
‘European banks are one of the few sectors in all of global credit with a multiple-year visibility of continued deleveraging. Regulatory changes have driven seven years of deleveraging and derisking that is likely to continue through 2019,’ he said.
Focusing on subordinated bank bonds, Zerah said these are cheap in absolute terms and also relative to industrial high yield. He added that the attractiveness of European contingent convertibles is also evident despite the wider market seemingly cooling.
‘In our view, because this asset class is young, isn’t included in broad market indices, and because these instruments haven’t been properly tested, the underlying credit risk is mis-priced. Quality retail franchises such as BBVA or Unicredit, especially if issued during times of heightened political uncertainty, can be purchased for very attractive 8-9% yields.’
Buying up broken assets
Elsewhere, he singled out European CLOs. ‘This remains a broken asset class, where regulatory constraints and crisis scars allow us to benefit from very attractive spread levels.
‘Furthermore, the default rate on European CLOs has been very low over the past 20 years. While we first focused on AAA tranches, we currently adopt a more tactical approach to seize opportunities in more junior segments.’
Zerah said AAA spreads are now close to their post-crisis tights – although, junior spreads are still at wide levels and offer very attractive risk/adjusted returns. ‘Spreads are at around 600 basis points for BB tranches and at 800bps for B tranches. For similar technical reasons: the investor base has not really expanded to absorb new issuances resulting in a stabilisation/widening in credit spreads.’
Also within his global bond remit, Zerah said he is finding opportunities in commodity-related corporate bonds, which should benefit from the pick-up in global growth and inflation, as well as commodity prices rebounding
‘However, selectivity is key in an environment that will remain volatile. Evaluating each country and corporate risks and opportunity set is fundamental to singling out the best stories in this asset class,’ he added.
On a three-year basis to the end of February 2017, the Carmignac Pfl Global Bond fund lost 1.90% in US dollar terms. This compares to a 1.94% loss by the JP Morgan Global GBI Unhedged TR, its Citywire-assigned benchmark, over the same period.