New Capital USD Shield Fund

30 April 2024

Marketing Communication

Executive Summary

Key events in market

The risk of escalation of tensions in the Middle East has characterised the last part of the month. The US Credit bond market delivered a negative performance in April, with the shorter maturities overperforming the longest ones. In details, the Fund’s reference market (ICE BofA 1-3 Years US Corporate excluding 144A Index) was down by 0.19% during the month, while the 3-5y bucket was down by 1.09% and the 10+y bucket down by 4.66%.

Key performance & positioning updates

The Fund ends April with A rating, 5.64% in terms of yield, modified duration at 1.89 years (vs 1.73 years of the reference index).

Market Update

The global stock market rally suffered a setback in April. The MSCI World All Countries Index total return was -3.3% for the month, reducing year-to-date gains to +4.8%. Government bonds also suffered, and 10-year Treasury yields rose temporarily above 4.7%. The US dollar strengthened further, especially against the Japanese yen, supported by the prospect that the Federal Reserve will not cut interest rates before the November presidential election. Finally, commodity prices, including gold, oil and industrial metals, have risen in response to geopolitical tensions.

The risk of escalation of tensions in the Middle East has characterised the last few weeks. The situation remains fluid and must be monitored closely. The same is true of the developments of the war in Ukraine and the US presidential election.

The other driving factors for the markets are linked to the revisions of monetary policy expectations and the tentative signs of recovery in China. The strength of US growth and inflation suggests that the Federal Reserve will wait to reduce interest rates. Conversely, the faster than expected decline in inflation in Europe points to possible rate cuts during the summer. In Japan, the central bank has begun the exit from the ultra-expansionary policies of the last thirty years but is proceeding with caution.

The Chinese economy has shown some momentum after a long period of relatively weak growth. In the first quarter of 2024, GDP grew more than analysts’ expectations and several indicators point to a continuation of the recovery for the rest of the year, a factor which has probably supported the prices of industrial metals.

Finally, in early 2024, corporate earnings had a good performance, driven, once again, by large US technology companies and financial firms.

Fund Performance & Positioning

From a sector point of view, we have almost the same exposure than the reference market in the financial sector (48% vs. 47%), but we have broader diversification in terms of countries and issuers. We don’t have any subordinated debt or US regional banks and we still have 16.3% located in very short maturity USTs because of high liquidity and interesting yields provided. We prefer to avoid regional banks because they have a high concentration of Commercial Real Estate (CRE) risk. Moreover, new reserve requirement applied recently on smaller banks already raised problems in regional banks such as New York Community Bancorp. Hence why we think being very selective in this sector is essential.

In terms of countries, we are well diversified outside US. We are exposed to 15 countries, five of which are outside the reference index (exposed to 16 countries). Our major overweights are in France (+9.4%), Spain (+4.8%), Netherlands (+3.2%), Germany, UK (+3.1%), and Switzerland (+2.3%). Our major underweight is in the US (-31%), mainly due to underweighting financials (-22%) and Industrials (-6%).

The Fund’s duration is similar to the benchmark (1.89y vs. 1.73y at the end of April). Our 3-5y exposure (our universe is up to 5y) built since the beginning of the year on the primary market detracted 36bps, while 0-1y and 1-3y buckets provided +23bps and +3bps respectively. In terms of trading activities, we completed switches in WSTP (2028 vs. 2029 for yield pick-up), joined the primary market for EDF ’29 and C ’26, sold WMT ’26 and PG ’26 because of low ESG rating/yield. We used also some USTs to buy new names above.

We continue to keep an overweight on the higher rating buckets increasing the AAA/AA (+20.1% vs. previous 19%), while single A bucket is stable at -0.8% and BBB bucket slightly decreased at -18.9% (from -18.2%). We are invested in 80 positions (vs. 1’545 of the reference index). At the end of the month the Fund provided an A average rating (vs. A- of the reference index), with a 5.64% in terms of yield and 1.89 years in terms of duration. With the normalization of the yield curve in place, and given the multiplicative effect of the duration, our investable universe is going to be positively impacted by the slightly longer maturities. For this reason we have been repositioning the portfolio to some longer duration. This has temporarily increased the absolute risk which is still below the benchmark (1.78% vs. 2.12%). We believe the opportunity is worth the slightly higher risk.

Given the fact we are still finding enough opportunities in the Investment Grade market, we do can avoid countries like Russia and China. We do not invest in aggressive and volatile positioning (high yields and/or subordinated bonds). We have never been invested in Credit Suisse or real estate. The Fund has all USD denominated issuers, so no Forex exposure. In addition, the Fund is an Article 8 with 56.4% ESG score vs. 53.3% of the reference index.

Outlook

The risk of tensions escalation in the Middle East remains fluid and needs to be monitored closely. Developments of the war in Ukraine and US presidential election are other topics to be monitored. Last, but not least the other driving factors for the markets are linked to the revisions of monetary policy expectations and the tentative signs of recovery in China. The strength of US growth and inflation suggest that the Federal Reserve will wait to reduce interest rates. Next Federal Open Markets Committee (FOMC) meeting is on May 01 and the market expects the Fed to cut once (0.25%) or maximum twice (0.50%) in 2024. The first cut is not expected before the September or November meeting.

While the status of the USD as the reserve currency will not be questioned anytime soon, other factors are likely to turn less supportive in terms of stability (i.e. the worsening fiscal profile could also affect sensitivity to interest rates, mainly longer maturities). The positive growth outlook and what we regard as the likely decline in near-term interest rates are supportive of, in our opinion, of having exposure to credit and locking in short term yields.

Concerns about public debt sustainability, a bumpy start for inflation in 2024 and tight credit spreads are the main variables to be monitored. The May meeting should provide more information about the evolution of the balance sheet runoff. The announced slowdown of bond disposal should begin in May or June and the process should stop around the turn of the year. We still see risks skewed towards lower-than-expected rate cuts.

The US elections, even if still seven months away, bear the risk of intensifying US/China tensions with much higher US tariffs triggering a new trade war. The risk of intensified global fracturing stays high, given the persistent hot spots (Ukraine, Middle East, Taiwan). We also carefully watch ongoing financial risks notably in the commercial real estate sector. This is the reason why selection within the US financial sector is and will remain key even though valuations are attractive. The health of regional banks is something that the market and the Fed will have to contend with in the coming months.

We continue combining high quality floating rate and fixed rate securities to hedge against changes in central bank perceptions due to growth outlooks as well.

We adhere to our approach that aims to maximize diversification through a strong and repeatable investment process which is focused on risk. Our proprietary risk tool is picking up a series of small idiosyncratic risks in the investment universe that we do not want to run after, while we make sure we are better diversified on the main risk factors. We continue to avoid subordinated bonds, regional banks, low liquidity issuers/bonds and countries such as China. Those elements seem to be (looking at the risk metrics) an important missing factor in our diversification but we like not to be exposed to those factors.

We are strongly committed to our cautious approach. We screen our universe for the positions with the highest diversification potential to find new opportunities (including new issues on the market). Quantitative and qualitative experiences challenge each other and aim to deliver the best risk adjust return for our clients.

Rising interest rates and tightening monetary conditions have resulted in the flattening of investment grade yield curves. This is less true now, but investors can still secure a good yield for short-dated maturities whilst reducing exposure to duration risk. This is crucial in a volatile and uncertain rate cycle. Over the last 10 years the yield spread between corporates 1-3y and 5-7y has been on average 96bps. Now, the 5-7y bucket is yielding only 4bps more than the 1-3y one. We believe the portfolio is positioned to capture the upside from stabilization in either a global negative or positive scenario having a balanced exposure to credit, while being on a high potential position on the yield curve.

We believe that by focusing on short-term, high-quality investment grade universe, the Fund represents a positive investment solution for clients for the following reasons: 1) embedded risk framework process (which aims to preserve capital), 2) current yields levels (not seen since 2008), and FED monetary policy ahead (tightening). 3) De-risks the asset allocation in portfolios providing a strong, repeatable, and cautious approach while investing in the short term IG universe.

Fund Managers

Grazia Cozzi

Senior Portfolio Manager
Lugano

Fixed income

Detail

Sara Halm

Portfolio Manager
Lugano

Fixed income

Detail

Find out more

Disclaimer

MARKETING COMMUNICATION

For professional clients, qualified investors and accredited investors only. The value of investments and the income derived from them can fall as well as rise, your capital is at risk. Note: Past performance is not a guide to the future. Returns may increase or decrease as a result of currency fluctuations.

All sources: EFG Asset Management (UK) Limited ("EFGAM"), Factset, Bloomberg, Morningstar as at end of the month. Any other sources as applicable.

This document has been produced by EFG Asset Management (UK) Limited for use by the EFG International ("EFG Group" or "EFG") worldwide subsidiaries and affiliates within the EFG Group. EFG Asset Management (UK) Limited is authorised and regulated by the UK Financial Conduct Authority, registered no. 7389736. Registered address: EFG Asset Management (UK) Limited, Park House, 116 Park Street, London W1K 6AP, United Kingdom, telephone +44 (0)20 7491 9111.

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For Professional, Institutional and Wholesale Investors Only. This document has been prepared and issued by EFG Asset Management (UK) Limited, a private limited company with registered number 7389736 and with its registered office address at Park House, Park Street, London W1K 6AP (telephone number +44 (0)20 7491 9111). EFG Asset Management (UK) Limited is regulated and authorized by the Financial Conduct Authority No. 536771. EFG Asset Management (UK) Limited is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides to wholesale clients in Australia and is authorised and regulated by the Financial Conduct Authority of the United Kingdom (FCA Registration No. 536771) under the laws of the United Kingdom which differ from Australian laws. This document is personnal and intended solely for the use of the person to whom it is given or sent and may not be reproduced, in whole or in part, to any other person.
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Offering Documents

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