How does the Allspring EUR Short Duration Credit Fund invest?
28 MAY, 2024
By Jose Luis Palmer from RankiaPro Europe
Alex Temple is a senior portfolio manager and the head of Credit for the Global Fixed Income team at Allspring Global Investments. In this role, he is responsible for investment-grade-focused portfolios. He joined Allspring from its predecessor firm, Wells Fargo Asset Management (WFAM). Alex started with the firm as a rates portfolio manager for the Structured Products group, structuring derivatives for WFAM’s pension fund and insurance clients. Prior to that, Alex was a vice president with the Global Debt Analytics group at Merrill Lynch. Earlier, Alex served as a consultant for LogicaCMG specializing in the banking sector. Alex began his investment industry career in 2001. He earned a master’s degree with honors in mechanical engineering from Bristol University. Alex has also completed the Sustainable Finance Programme at the University of Cambridge Institute for Sustainability Leadership, and he is a Fellow of the Royal Geographical Society.
What is the fund's investment strategy regarding asset selection and risk management in the current economic environment?
The EUR Short Duration and EUR Investment Grade credit funds invest predominately in the European Investment Grade Corporate Bond market.
Investment grade credit yields back at multi year highs and quantitative tightening by the European Central Bank (“ECB”) means that dispersion has returned to credit markets - it is now a stock pickers market.
A disciplined approach to security selection is the primary driver of our funds outperformance, leveraging on the experience of our Global Credit Research platform.
Additionally, our EUR Short Duration fund has a 1-5year benchmark which differs from the traditional 1-3year benchmark often used by short duration funds. This vastly increases the number of eligible assets including those available in primary markets and hence widens the opportunity to generate alpha.
What has been the fund's historical performance during market volatility?
The funds rely on portfolio construction and security selection to ensure that they perform as expected during periods of volatility. History shows that periods of extreme volatility are usually short lived and are followed by generous new issue premiums as the primary market re-opens which is often a reliable source of alpha.
How do you assess the near-term economic outlook and its impact on the corporate bond market?
The European economy is starting to see signs of improvement in growth having narrowly avoided a technical recession in the second half of 2023. Inflation, whilst elevated, should fall as wage pressures subside and this should allow the ECB to move away from the current restrictive policy stance and start cutting interest rates.
Expectations of these rate cuts, combined with record yields and investor demand for the asset class should ensure that credit spreads continue to trade in a narrow range in the second half of 2024.
What are the main risks facing the fund in the current environment and how are they managed?
The current higher for longer interest rate environment has continued to challenge over-leveraged business models and companies with complex financial structures and/or governance issues. These are the types of credits that we seek to avoid. Our funds are benchmark aware but not benchmark centric – if we do not like a company, we will not own its bonds.
Could you talk about the credit quality of the issues within the fund's portfolio and how do you ensure that you maintain an appropriate level of credit quality?
The average credit rating of the EUR Short Duration and EUR Investment Grade funds is A-/ BBB+ so solid investment grade. Both funds have the ability to invest up to 10% into high yield, although from an investment grade investors perspective, BB rated credits currently screen as rich to BBBs and hence we are overweight to BBBs.
Higher risk-free yields and credit spreads that are no longer compressed by the ECB’s asset purchase programmes allow our funds to maintain an appropriate level of credit quality without having stretch to riskier names.
How is the portfolio distributed geographically and sectionally, and are there any specific areas where you are overweighted or underweighted?
The funds are currently underweight debt issued by companies in France and Germany as their credit spreads screen as rich given the economic challenges that both countries are currently facing.
From a sector perspective, the funds are both overweight Banks and Real Estate.
Banks are benefiting from higher yields and the post GFC regulation means that they are well capitalised.
Real estate is a sector that has grown as a share of the Investment Grade index. Whilst the current economic climate has been a challenge for some real estate companies, others have managed to pass through inflation via rents and property values have held up reasonably well and we have targeted these companies who still trade wide to the index.
Both funds are underweight the Auto sector as it trades rich on a spread basis and many European names are exposed to the Chinese economy which continues to struggle. Additionally cheaper Chinese Electric vehicles (EVs) in Europe are challenging domestic EV market pricing further putting pressure on margins.
What are the main opportunities and challenges you foresee for the fund in the coming months?
The two main challenges currently facing the market stubbornly high global inflation data and a number of elections due in the second half of 2024 (US/UK/India to name a few.).
From an inflation perspective, this seems to be more of a US issue for now and we believe we will see 3 rate cuts from the ECB starting in June.
On the election front, a Trump presidency could see a renewal in the trade wars that dominated his first term and this could have implications for Europe. This is one of the reasons we are underweight European auto manufacturers. Also, the US elections could lead to more government spending and in turn lead to higher deficit financing which would continue to put pressure on US inflation.
