Credit portfolio managers: “A need for liquidity”
Stock markets are crashing, as are the credit markets. What is the reaction of Carnegie Fonder’s fixed income managers to the Covid-19 crisis? Niklas Edman and Mikael Engvall provide their comments.
“We are in the midst of a very dramatic event, as I am sure everyone is aware. This is a ferocious meltdown,” says Niklas Edman, who manages Carnegie Corporate Bond and Carnegie High Yield Select alongside Maria Andersson.
Mikael Engvall agrees. Together with Mona Stenmark, Mikael manages Carnegie Investment Grade and Carnegie Likviditetsfond, and has a background as a broker of emerging market shares.
“The ongoing events are somewhat reminiscent of the 1998 Russian crash, with bizarre movements where there are absolutely no buyers for some securities. It is impossible to protect yourself completely, but I am glad we have our focus on value companies with good liquidity. Many credits are being unfairly punished and have fallen to very attractive levels,” says Mikael Engvall
How long do you think this will last?
“I have no idea, it’s impossible to know. The developments of recent weeks have been very worrying, but if you are confident with your portfolio you can see that many credits today look really attractive, with quite a good risk reward. As always, you have to be long-term and selective, and that is something we have always tried to emphasise. Everything is being hit right now – all asset classes, all countries, all industries. But as the fog clears, I am convinced that a lot will turn out to be very much worth buying,” says Niklas Edman.
The Swedish government is providing more than SEK 300 billion in emergency support, including taking over responsibility for sick pay for two months. What do you think about this?
“It is good that initiatives are being taken to support companies. This is a deep crisis that requires lots of action at every level. In terms of the credit market, however, Norway has taken the lead with plans to inject 50 billion kronor to improve liquidity. This is very welcome. Norway is severely affected by the weak oil price, so it was early to offer support. We will have to see whether the Swedish government can come up with a similar initiative,” says Niklas Edman.
What are you doing in the funds right now?
“We are trying to keep a little more cash than usual, especially in Carnegie High Yield Select. There has been a lot of focus on managing flows lately, with sales as some unitholders want to withdraw their money. It is clearly very sad to see everything declining, and we completely understand anyone who wants to realise their assets, but right now we are planning forward. As always, we are focusing on company analysis and bond picking. For example, the major banks have subordinated credits that now yield 10 percent, and that is very attractive,” says Niklas Edman.
Has the risk level of the funds changed recently?
“No. As we manage the flows, we are selling holdings broadly, more or less salami slicing. But as we look at the opportunities that are now emerging, we are, as usual, more selective, based on company and credit analysis. This is where we have our edge,” says Mikael Engvall.
What is the underlying return on the funds now?
“As I said, liquidity is not the best and prices are changing quickly. But in Carnegie Corporate Bond the yield is 5-6 percent, compared with only 3 percent just a few weeks ago,” says Niklas Edman.
“In Carnegie Investment Grade the yield is 1.5 percent, and in Carnegie Likviditetsfond 0.8-0.9 percent,” says Mikael Engvall.
This is a serious crisis that affects us all. How are the portfolio managers working to reduce the risk of illness?
“We have divided up all departments at Carnegie Fonder into two parts, one working from home and one working at the office. This applies not only to the portfolio management, but also to administration and customer services. We have also cut meetings back to a minimum. Customer meetings and company visits will have to wait, but most things can be done by phone or email,” says Niklas Edman.