Update on... Echiquier Hybrid Bonds | June 2024
Uriel Saragusti, Matthieu Durandeau, Aurélien Jacquot, CFA, Fund Managers for Echiquier Hybrid Bonds, La Financière de l’Echiquier
Echiquier Hybrid Bonds is invested in hybrid bonds issued by high-rated non-financial companies and offers a diversification solution for high yield funds. At 31 May 2024, the fund had a high gross yield of 4.9%[1] despite the scale of the rally in recent months.
Operations
Economic outlook
Hybrid bonds are subordinated bonds issued by non-financial companies that offer issuers greater flexibility than senior debt – either bank or bond. In particular, they allow them to defer the repayment of principal or the payment of coupons. In exchange for this flexibility, companies agree to pay bondholders a higher return than on their senior debt. Although companies very rarely extend the maturities of their hybrid bonds, the fear that they will do so can put pressure on the price of these bonds in tense markets. We therefore believe that a dynamic management approach is appropriate for this strategy, with the volatility of interest rates and risk premiums providing opportunities to optimise portfolios over time.
Fundamentals
Mobility is at the heart of Echiquier Hybrid Bonds’ management approach and has been a key performance driver in recent years. With very little exposure to real estate companies in 2022 due to the rising interest rate environment, the fund repositioned itself in the sector last year, on attractive valuations as interest rate visibility improved, thereby benefiting from the rebound. We favoured issuers with credit profiles that we felt were best placed to cope with high interest rates over the long term, namely Unibail, Castellum and Akelius. We are maintaining this approach, as the sector could suffer further if interest rates are not cut as anticipated in the short term, putting the most vulnerable real estate companies at risk. The management team has also been active on the overall portfolio balances in order to manage exposure to interest rate and credit risks over time. While the fund was less sensitive to these factors than its benchmark[2] at the end of 2021, the opposite is currently the case. Echiquier Hybrid Bonds is a conviction-based fund that is highly concentrated over time. The fund’s ten biggest issuers represent a cumulative weighting of around 50%.[3] The fund has a high turnover rate, with half of the ten biggest issuers in the portfolio having been replaced over the past 18 months, based on the relative value of the bonds in the portfolio.
Investment strategy
The European bond market is once again attractive, and the return[4] has increased the fund’s ability to absorb any market shock. In 2024, our strategy will be to maintain our exposure to a possible fall in interest rates while benefiting from a high yield compared with historical averages. We also believe that improved macroeconomic visibility should reduce volatility and make corporate bonds more attractive. Our dynamic approach aims to take advantage of credit market volatility, which creates opportunities. We therefore remain vigilant, and will adjust our positioning and issuer selection in line with changes in the environment. Balance and agility will remain the essence of our strategy over the coming months, with the search for yield as our compass.