Nicolas Julien
CFA, Head of High Yield & Credit Arbitrage
In recent years, new structural trends have emerged, such as the polarization of the world, the relocalization of supply chains and the fight against climate change. These new trends are leading to higher inflation and lower growth. This new paradigm is having a significant impact on the financial situation of companies, and therefore on investment in corporate bonds. This calls for strategic adaptation on the part of investors. Adopting a strategy that aims to deliver a performance independent of credit market trends would therefore appear to be an investment solution worth considering in this new environment.
This paradigm shift has important implications for monetary policy, which can no longer be as accommodating as it was in the previous decade. As a result, we can expect more volatile[1] credit spreads, more dispersion between "good and bad students" even within the same sector, and higher default rates. This new environment seems particularly suited to alternative strategies seeking to take advantage of both tightening and widening spreads.
Our strategy invests predominantly in corporate bonds of issuers based in developed countries, with a credit rating equivalent to or higher than CCC/Caa2 from a recognized agency or bonds determined to be of equivalent quality according to our internal analysis. This is a purely long/short[2] credit strategy, with no particular bias, based on a selective, high-conviction approach designed to generate performance with a low correlation to market trends, whatever the context.
The strategy focuses on in-depth bottom-up[3] research, enabling us to identify buy or short opportunities in the credit markets. The strategy operates across a broad investment universe (Investment Grade and High Yield) to ensure diversification, and is generally free from any specific bias. The complementary nature of the "long" and "short" positions is designed to produce a portfolio with low correlation to the market. To manage volatility, the team also incorporates a tactical[4] overlay.
The objective is to outperform the capitalized €STR©[5] index in all market conditions, with ex-ante volatility of less than 10%[6].
Since its launch in February 2021, our strategy has shown consistent performance every year, delivering positive returns even when credit indices fell, notably in 2022[7]. Thus, despite a difficult environment, we recorded a positive performance of 5.79%[8] that year. In 2023, the strategy maintained its momentum with a similarly positive performance of 8.48%[9], capturing a significant share of the credit markets' gains.
Since its inception, the strategy has posted a performance gross of management fees of 17.49%[10]. By comparison, its benchmark index returned just 3.59% over the same period, representing a cumulative outperformance of 13.90%. Thanks to its ability to generate positive, uncorrelated returns with reduced volatility, even in unfavorable market conditions, this approach is, in our opinion, a strategy offering an attractive absolute return opportunity in a diversified portfolio.
Candriam's alternative credit strategy stands out for its high-conviction approach to the market's best "long" and "short" opportunities, and for its active position management based on over 15 years' expertise in long/short credit management. This combination makes it a robust solution for investors seeking to navigate all credit market configurations.
Discover how Candriam, with its low-correlation alternative strategy, is navigating the credit markets in these paradigm-shifting times. Nicolas Jullien, CFA, Head of High Yield & Credit Arbitrage and Thomas Joret, Senior Fund Manager, provide you with the essential information you need to understand this strategy.
[1] A bond's spread represents the difference in yield between a bond and the yield of a risk-free bond for the same duration.
[2] Traditional management simply involves buying financial products, betting on the markets to rise (Long Only), while the alternative approach takes both long and short positions (Long/Short).
[3] Bottom-Up" management is an investment approach that focuses on the individual characteristics of each company, rather than on sector conditions or the global economy.
[4] The "overlay" approach consists of applying a "second layer" of management in the construction of a portfolio, with the aim of optimizing its risk/return profile.
[5] All rights reserved
[6] Volatility could nevertheless be higher, particularly in abnormal market conditions.
[7] Performance of -13.5% for the ICE BoA GHY BB-B Non Fin. index in 2022, source Bloomberg
[8] Source : Candriam
[9] Source : Candriam
[10] Source: Candriam from 03/31/2021 to 02/29/2024
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