AA-rated credit PM piles up dry powder on new issue hopes

Opportunities in Europe’s primary credit market are expected to grow this year, so it makes sense to have cash on hand to take advantage of them.

That’s the view of Henrietta Pacquement, rated AA by Citywire, who manages a handful of European credit strategies at Allspring Global Investments.

Talk to Citywire SelectorPacquement (pictured) said she had increased cash levels in the Allspring EUR Investment Grade Credit fund, which she co-manages with Alex Temple and Christopher Burrows, to take advantage of upcoming opportunities as central banks begin to step up their recovery efforts.

She said cash levels in the 114 million euro fund fell from 4% at the end of 2021 to between 7% and 8% in January. The management team has given up engaging so intensely with the primary European credit market.

“So far, we haven’t particularly participated in a new issue market,” she said. “It’s a double reason: the new issue bonus was there to a certain extent, but the bonuses were on the secondary, but not enough, in our opinion. It scared us away.

“Also, if you expect a little more volatility in terms of the spread, you can have a little more volatility in new issues. These bonds are a little more liquid, less well held. They can move a little more than entrenched secondary market bonds.

Pacquement said they had, in effect, “steered clear” of the primary market for the time being, but with an eye to primary issues coming to market at a more attractive short-term premium as the rate situation develops. exchange.

“What we did before that happened was we got more dry powder, a little more money in the wallets. We still like the credit market, but wanted to have some dry powder to seize opportunities in the secondary or be ready for the primary market when it comes with better entry points. So we did that in advance. Now we need this new issuance schedule to hit the market at this point.

In the EUR Investment Grade Credit fund, managers focus on A-rated credit – the average credit rating – while the average maturity sits at 5.6 years. Pacquement said there was an appreciation that much of the market’s thinking has become more short-term as investors worry about the long-term effects of interest rate hikes.

“It makes sense if you expect more long-term volatility, you see short-term rate hikes, so you won’t be completely isolated. But if you increase your duration, you won’t experience the same long-term volatility.

“Another thing that people are looking at is floating rates, even in emerging markets we had our first floating rate note in a while, on the investment grade side. We may see some more of that and we’re also seeing some great loans right now.

“Again, you are looking at more floating rates. So in the short term, floating rates might make sense. So potentially rates are going up, and our feeling is that they can’t go too far in a heavily debt-dependent system, so you start looking at the long term a bit more.

In terms of sector allocation, the EUR Investment Grade Credit fund has 26.7% allocated to bank debt, although it is underweight the fund’s benchmark, the ICE BofA Euro Corporate Index. Instead, the team adopted marginal overweights in areas such as insurance, telecommunications and real estate.

The Allspring (Lux) WF EUR Short Duration Credit fund returned 4.2% in euros over the three years to December 2021, while the average return for the Bonds – Euro Short Term sector was 1.1% .

Over the same period, the EUR Investment Grade Credit fund posted a performance of 9.8% in the Bonds – Euro Corporates sector, against an average of 7.9%.