Why would you describe this fund as a 'one to watch' and how could the strategy work in investors' portfolios?
The key features of the Algebris Global Credit Opportunities fund are its flexible, benchmark-free approach and the combination of a top-down and bottom-up approach. The fund is flexible as it is not managed to an index and invests across the fixed-income universe. The team's relatively broad mandate allows them to actively mitigate market risk across credit, rates and equities, to ensure investors' exposure to volatility is optimised. They see flexibility as an important aspect of their approach, generally but especially in 2021, as wider rates will continue to weigh on bond markets, and possibly spill over to other asset classes later in the year. The combination of top-down and bottom-up inputs is an important differentiator compared to other global credit funds, that tend to focus on just a couple of asset classes which can lead to a concentration of risk. The Fund should be viewed as a diversifier within the typical fixed income allocation; something that the team believes will be especially important in 2021.
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?
The strategy targets 6-7% total return across the investment cycle, with 5-6% volatility. It invests across all fixed income assets, with a historical focus on high-yield corporate credit, emerging market debt, and financial credit. The team actively manages volatility across credit, rates and equity markets. The combination of actively managing cash exposures and volatility across credit, rates and equity markets allows them to deliver convex returns to investors: they retain the upside from convictions on the cash side and protect against downside risk actively and efficiently across markets. The team's process starts with producing a macro view on a three-to-nine month horizon, which serves as an input for the geographic / sector allocation of the cash book, and for more tactical decisions on the part of the portfolio that is designed to help manage volatility. The team selects the best bottom-up opportunities consistent with the macro outlook and conducts due diligence on these specific names. Existing positions are monitored closely. The team is managed by of the lead PM, two specialist PMs (with expertise in corporates & EM) and two analysts. They team are supported by an AI and Big Data team that performs data analysis to inform the top-down picture. The lead PM is in charge of the top down view and the main calls in terms of risk allocation. The specialist PMs concentrate on single credit names. The analysts contribute to both top-down and bottom-up analysis. All decisions are discussed across the team with the lead PM owning the ultimate decision.
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.
At asset class level, we are long convertible bonds in "re-opening sectors". With vaccine rollouts accelerating and re-opening sectors still trading at a discount in equity markets, convertibles offer an asymmetric risk-reward. The current focus is on energy, hospitality and cruise sectors. On an opportunistic basis, the team will invest in bonds with extremely low credit risk to benefit from the equity delta. They will also invest in convertibles to add equity upside to an existing spread level. Convertibles tend to have very short duration so sensitivity to global yields is minimal. The convertibles allocation is currently ~25%. At single-name level, the fund is invested in the largest Mexican oil producer that is 100% government-owned and has received multiple bailouts over the past few years. Even so, the bonds trade 400bp over the sovereign at the highest spread among global peers. The government has recently announced that the support program for the company will step-up in 2021, so spread compression will likely add to the high carry this year. Mexican debt/GDP is 65%, which is among the lowest in large EMs. The fund holds a similarly strong conviction in a Finnish airline that is 100% owned by Finland (AA rated) and yielding 7% in EUR.
