Alvaro Peró Gala, Investment Director at Capital Group UK
Why is your fund a ‘fund to watch' and how could it work in an investor's portfolio?
Capital Group UK – Global Corporate Bond Fund invests in high-quality global investment grade (IG) corporate bonds with no active allocation to high yield. The purity of such an approach provides a clear risk profile and potential for portfolio resilience during periods of market volatility.
The global opportunity set provides diversification across markets and access to a large and growing asset class, with a greater depth and broader range of issuers providing improved liquidity compared to domestic corporate bond markets. The market offers the potential for higher yields without taking on significantly increased risk relative to regionally focused strategies. The high-quality nature and longer duration profile of IG credit offer diversification from more volatile asset classes such as equities, and can act as a portfolio ballast in times of market stress or volatility. Our fund has no structural sector or style bias, as investments are made on the merits of individual securities and value relative to peers.
An important differentiator of our strategy, and an outcome of our bottom-up investment process, is that we have shown a relatively low or even negative correlation of excess return versus peers, who may rely on a more top-down-oriented investment process.1 Over 90% of the strategy's excess return is estimated to be driven by the selection of securities and industries. We seek to offer investors a clear, repeatable and robust source of IG returns.
Can you give an overview of the team running the fund and your investment process?
The portfolio is built bond-by-bond by a team of 17 investment professionals who have an average of 17 years' investment experience – this includes 16 investment analysts, investing in their specialist sectors, and a principal investment officer (PIO), Damir Bettini. The analysts are based in LA, New York, London and Singapore, to provide a truly global overview of the IG market. We believe investors can generate alpha from investing in investment grade corporate bond markets through fundamental research without adding extra risks such as investing in high yield or taking significant top-down risk via active duration or currency. However, this approach requires an extensive team of dedicated IG analysts who invest in their specialist sectors. The approach follows four steps: 1) fundamental research, 2) discussion of investment ideas, 3) portfolio construction and 4) implementation and oversight. The process is grounded by fundamental and highly intensive research. Analysts use a combination of economic and market analysis, valuation tools and on-site research trips to generate their views and investment ideas, and work closely with their peers in Trading and Equity research for added insight.
What do you see as the big opportunities and risks for your strategy?
Central banks have begun their cutting cycle and holding cash has become less attractive compared to other areas of fixed income as front-end rates have fallen. By allocating to investment grade corporate bonds, investors have the opportunity to lock in historically high yields to capture current income and potential future returns.
Historically, high quality fixed income has outperformed cash after policy rates peak and yields start to fall. The potential for attractive total returns from both a yield and capital appreciation perspective could make IG an appealing proposition for clients. Our global approach means we could capitalise on the most compelling investment opportunities.
With stable economic conditions and rising corporate profitability, the US economy seems to be reversing from late-cycle to mid-cycle. As default risk typically declines in mid-cycle, IG bonds have become a more appealing investment option and the fundamental backdrop for corporates appears healthy.
The biggest risk to corporate markets is stagflation. An environment where inflation becomes entrenched but there is no growth would see central banks face a policy headache – monetary policy needs to ease to boost growth but can't fuel inflation. In the event companies can no longer pass on price increases to a budget-strained consumer, we would expect to see pressure on corporate margins and could see an underperformance of spreads. This is not our base case, as we remain constructive on the US economy and believe the Fed will continue on its easing path with inflation controlled and labour markets supported.
Can you identify a couple of key investment opportunities you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Focus on idiosyncratic opportunities: Against a backdrop of economic uncertainty, our preference is for investment opportunities selected on a company-by-company basis where our analysts identify strong potential returns. In Europe our top conviction area currently is the banking sector, which offers attractive valuations relative to the broader corporate bond market. In particular, those that operate in countries like Spain, Italy and Greece as they have not been as profitable as they are today, combined with strong fundamentals after a decade of deleveraging. Euro Bank, in Greece, was recently upgraded to investment grade.
In the US, despite relatively tight valuations at the index level2, the focus area has been on the pharmaceuticals sector as it has not only offered the most attractive valuations over the last 20+ years but also protection in case global economic growth deteriorates as it tends to be a traditionally non-cyclical defensive sector. Amgen, a pharmaceutical company based in California, is having very promising results on an obesity drug that could be game changer for the sector.
Alvaro Peró Gala, Investment Director at Capital Group UK is a speaker at Funds to Watch
Data as at 31 December 2024 and attributed to Capital Group, unless otherwise specified.
1Based on Capital Group Global Corporate Bond Fund (LUX) as a representative account of the strategy are after management fees and expenses for the Zgdh-GBP share class, as a representative share class. 5-year correlation of excess returns vs. Bloomberg Global Aggregate Corporate Total Return Index hedged to GBP.
2Bloomberg Global Aggregate Corporate Total Return Index hedged to GBP
