The month of March started with imminent spread widening on the back of the conflict between Ukraine and Russia over the peninsula Crimea. The conflict caused fear in capital markets which in turn led to a selloff in risky assets. However, sentiment quickly turned as inflows into credit pushed spreads tighter.
At the middle of March the Crimean population voted for independence from Ukraine and subsequent annexation in Russia. This calmed down capital markets and led to further spread tightening. By the end of the month Option-Adjusted-Spreads (OAS) on Investment Grade (ex-financials) and High Yield (ex-financials) had tightened by 2bps and 12bps to 105 and 322 respectively.
Fund commentary
In March, the fund returned +0.38%. The top performing holdings in March were UPC (Media), Softbank (Telecom) and Interxion (Services). The bottom performers were Play (Telecom) and Volkswagen (Auto). Volkswagen bonds underperformed after the company decided to issue more hybrid debt. The concession offered on the new bonds caused the outstanding bonds, which we hold, to underperform during the month. No changes in portfolio’s holdings during the month. Although the primary market continued with good volume in both High Yield and Investment Grade, we did not find new issues suitable to enter the portfolio.
We sold one investment during the month, namely Lecta (Basic Industry), a French paper producer which in spite of extensive cost saving exercises has not been able to improve their credit profile in line with what we had anticipated. Any further deterioration in the market environment would leave the company in a very difficult situation. The vulnerability of the company led us to sell the position. We expect continued high supply in the primary market in both High Yield and Investment Grade in 2014. We continue to monitor the market for attractive opportunities in both the primary and secondary market.
The European economy has been through a rough period over the last year, however the situation is improving. Most economies have returned to positive growth which means that most credits should survive in the current encouraging refinancing environment. As a result, rating agencies are expecting low default rates in the medium term. But the low growth environment leaves small margin for errors. Currently, the portfolio is exposed to non-cyclical companies which have stable operations to face an economic downturn or cyclical companies with a capital structure that enables them to weather economic downturns.
