Monthly Commentary

Investment Vehicle Manager Market & Portfolio Commentary – October 2020

20.11.2020

Risk sentiment continued to deteriorate in October as we approached the US elections and Covid-19 infection rates rose to new highs across Europe and the US. This resulted in partial national shutdowns which will impact the economic recovery. The case rise was particularly high in Europe, and European Equity indices such as the German DAX (-9.4% in the month) had their worst month since March.a Oil was another underperformer during the month with the WTI down 11% on global demand worries.a

European Sub Investment Grade Highlights

Loan issuance totalled €5.69bn in October, down 18.19% versus September 2020 and down 64.51% versus October 2019, driven by the uncertainty created by higher infection rates, partial shutdowns in some geographies and the run up to the US elections. New issue spreads in October were, on average, E+420bps, which remains wider than October 2019 at E+384bps.b

The Credit Suisse Western European Leveraged Loan Index, hedged to Euro, was up 0.25% for the month, which brings Year to Date ("YTD") returns to -0.88%. Cyclicals (0.33%) again outperformed defensives (0.12%). CCCs returned 2.03% while single Bs returned 0.23% and BBs returned 0.09%.The Credit Suisse Western European High Yield Index, hedged to Euro, was up 0.29% for the month bringing YTD returns to - 2.95%.

Market volatility caused by the resurgence of Covid-19 cases and a hotly contested US presidential election led to a very active October for the fund.

The performing book continued the trend of reducing non-core line items and lower yielding investments, rotating capital into both well priced/structured new issue and more attractive relative value opportunities. Some specific trades saw us focus on shorter dated paper of strong corporates at a fair discount. We also reduced certain concentrated positions. The portfolio remains well positioned for income generation and stable risk/return. As of October close, performing credit (including cash) was at 37.3% of the portfolio with a weighted average price of 96.3, trading at a YTM of 4.8%, delivering 4.5% cash yield to the portfolio.

Credit opportunities was equally busy during the month, adding to new and existing event driven situations at compelling levels, taking advantage of cross currency asymmetry (wider hedge adjusted yields for the same instruments in the same credit, USD versus EUR) while also participating in attractive higher yielding new issue. We lifted a block of term loan from a BWIC (Bids Wanted In Competition) for a credit that has performed strongly through the pandemic, while exiting situations where the catalyst had not evolved in line with our underlying investment case. The structured products book once again took advantage of strength in the market to reduce some exposure at levels we were very happy with. The portfolio remains positioned with a defensive tilt, albeit benefitting from multiple idiosyncratic event driven stories which should realise value while being more insulated from the impacts of the pandemic. As of October close, credit opportunities was at 62.7% of the portfolio, trading at a weighted average price of 86.7 and a YTM of 9.7%, whilst delivering a 6.6% cash yield to the portfolio.

On a total portfolio basis, as of October month end the weighted average market price was 90.2, trading at a YTM of 7.8%, and delivering 7.1% cash yield (on a levered basis) versus a weighted average price of 94.7, YTM of 6.6% and cash yield of 5.7% as of December 2019. Floating rate instruments comprised 83.1% of the portfolio. Senior Secured 85.4%. The investment vehicle portfolio had a cash position of 2.5% (including leverage) with leverage at 1.3x assets.

The fund continues to outperform the market following the original pull back from March, reflecting both our active trading strategy and willingness to hold attractive assets through the volatility, the latter being a key driver of recent gains. The performing book is well placed for stable income over the longer term while credit opportunities remains a fundamental alpha driver in the short to medium term. Opportunities remain abundant, despite the wider rally in credit markets, in both segments of the portfolio.

a Deutsche Bank Research, October 2020 Performance Review – 2 November 2020
b LCD, an offering of S&P Global Market Intelligence - November 2020

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