Portfolio manager says investment process and guiding principles must shape roadmap forward
All asset classes were hit hard by the twin shocks of the COVID-19’s economic standstill and the oil-related market collapse.
The Pender Corporate Bond Fund declined sharply in March, participating in the large and sudden drawdown that engulfed credit markets worldwide. To illustrate the seismic shift, portfolio manager Geoff Castle said that the fund’s yield to maturity, which was 4.95% at the end of February, now sits at 9.16%.
More broadly speaking, though, what do fixed income portfolio managers do next amid the market wreckage as uncertainty continues? Castle offered a roadmap for credit investing in these chaotic and volatile times, which is shaped by Pender’s investment process and guiding principles.
1, Keep the shape of the fund
“In order to have the ability to take advantage of opportunities as they present themselves, as well as to keep investor confidence in the Fund, it is important to maintain the ‘shape’ of the fund in terms of our weighting by risk tier. Tempting as it may be to ‘back up the truck’ on deeply discounted bonds, we need to preserve liquidity and flexibility by continuing to hold strong weightings in cash, government bonds and low default-risk securities.”
2, Manage for long-term fund holders
“Volatile markets bring the potential for broker quoted bond prices to differ materially from executable prices. Therefore, it is especially important in these times to promote full price discovery on the fund’s holdings, regardless of whether doing so has a short-term negative impact on the fund NAV. We believe a rebound in the NAV will come eventually. But, in the near term, the fund’s price should not be artificially flattered by stale prices, or by prices that reflect our disproportionate buying activity. Purchasers need to know they are buying a high-integrity NAV.”
3, Buy the markets the Fed is buying
“These are extraordinary times for central bank market interventions. Numerous markets that had not previously been subject to direct Federal Reserve purchases are now at least partially backstopped by a buyer with theoretically infinite purchasing ability. Recent history has shown that major central banks can be successful in moving prices in markets that they are supporting. The Fed supported markets are not the only interesting markets right now, but central back activity does change the risk:reward equation in certain high priority credit areas such as investment grade corporates and municipal bonds. And who are we to fight the Fed?”
4, Be aware of the potential to be layered by senior debt
“While there are many low prices available in corporate credit, not every discounted bond is attractive. Even a strong corporate balance sheet may look much worse after months of drastically reduced revenues. We believe it is a good approach to focus on the most senior series’ of debt, given that many companies are drawing down credit facilities to fund losses as opposed to funding productive assets. Senior debt may outperform subordinated debt coming out of the crisis if the subordinated debt has been layered by large revolvers or senior liens.”