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High quality credit at attractive levels

The ongoing reporting season should in practice be irrelevant since many companies were still functioning well for most of the quarter. However, it does provide evidence that the high level of uncertainty is leading to guesswork about the future, and the real test will come once Q2 and possibly even Q3 are reported.

The meltdown in the credit market hit all companies mercilessly, with an assumption that cash is king. In the past month, however, credit quality has played a role and some names have recovered from ridiculously low levels. The focus has shifted from purely flow-driven to evaluating the companies’ long-term opportunities in an attempt to avoid permanent loss of capital.

Many companies face the same short-term challenges, but have substantial opportunities to create long-term value, and we this month invested in high-quality companies at attractive levels. Industrivärden, Autoliv, Atlas Copco and Essity joined the portfolio when their bonds were priced as if the market expected a rating downgrade, sometimes by several steps, which to a certain extent ignored the long-term values in these businesses. To finance this, we reduced the proportion of high yield credits where we believe the risk is distorted, with either rating risk or weaker outlooks as the potential trigger.

The underlying risk/reward is attractive despite a slightly more defensive portfolio with continued very good liquidity, with a coupon return of about 7 percent.

Last year, we saw very good risk appetite and strong fund inflows pushing down credit margins to record lows. Following the advance of Covid, we have now seen a comprehensive price correction which means that credit margins are now at historically attractive levels. However, given the current sentiment and uncertainty regarding the spread of the virus, we are maintaining our conservative approach with a balanced and diversified portfolio focusing on liquidity. In addition, we continue to focus on sustainable companies, which we are convinced will contribute to the long-term return.

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