Focus on Carmignac’s credit expertise

• The pandemic and war in Ukraine have ushered in a new economic order

Risk-free rates and credit spreads rose in tandem in 2022, resulting in record losses in the credit market but also, and even more significantly, a spectacular rise in the yields on credit instruments. The end of the pandemic and the war in Ukraine have brought inflation back to the developed world and forced central banks to place a cost back on capital.

This unprecedented series of events has had direct repercussions on the credit market. Inflation has suppressed demand among not just consumers but also businesses, many of which may have to restructure their production chains, rethink their business models, and adjust their margins. In this new economic order, we can expect to see favourable conditions for fixed income and levels of carry in the coming years that we haven’t experienced in over a decade.

• Default rates to rise in the credit markets

Now that the main central banks are scaling back their liquidity injections, interest rates and credit spreads should settle at structurally higher levels. This marked increase in the cost of capital will likely push default rates back up to normal and bring back significant opportunities for generating alpha. Default rates had been held artificially low for years, prompting too many investors to allocate capital to inefficient projects and companies, meaning we’re now seeing attractive yields in the credit space. The expected rise in default rates hasn’t yet materialised, but credit spreads already price in an extremely pessimistic outlook for defaults over the next few years. As a result, the market is poised to absorb a substantial rise in defaults while still offering attractive carry.

• Appealing “complexity premiums” are back on the cards Higher default rates will naturally fuel the amount of perceived risk in the credit market. And the more fearful investors are of credit, the more opportunities there will be for asset managers who are driven by the fundamentals. Investing successfully in the credit market means finding a large number of issuers whose risks are overpriced. And unsurprisingly,** investors tend to overprice risks when the market as a whole is experiencing a high number of defaults**. It follows that today’s credit market not only offers attractive valuations, but also harbours a wealth of idiosyncratic opportunities enabling us to generate returns from both alpha and beta.

Our investments are concentrated mainly in investment themes that stand to benefit from the inflationary environment and higher interest rates. These themes include:

• Commodities sector: Energy producers and the associated services firms are getting a direct boost from the rising energy prices – a trend compounded by years of underinvestment in this sector. What’s more, many issuers offer a combination of solid (and improving) fundamentals, limited interest-rate sensitivity, and attractive credit spreads.

• Financials: Banks’ and insurers’ profit margins will likely be supported going forward by steepening sovereign yield curves, higher risk premiums, and the end of negative interest rates on deposits.

• Distressed debt: We’ve invested in a handful of special restructuring situations, which we view as potential opportunities with rewarding “complexity premiums”.

• Collateralized loan obligations (CLOs): Because these are floating-rate instruments, they can mitigate the negative effects of higher inflation, interest-rate volatility, and higher default rates while offering attractive returns.

Our credit team, established in 2015, is headed by Pierre Verlé and composed of experienced asset managers who employ a fundamentals-based approach. Thanks to their sound technical skills and rigorous investment process, they have a track record of delivering solid returns under a variety of market conditions. They currently manage a portfolio of over €10.9 billion¹ in credit-market investments (including IG, HY, DM, EM and CLOs).

Our credit team’s strong performance has earned numerous industry accolades. The team has an AA rating along with a Gold distinction from Citywire in the Bonds–Euro Corporates category, and is a winner of the EuroHedge Award in the Macro, Fixed Income and Relative Value category. We now deploy our credit investments through four strategies, each with a different risk-return profile so as to cover the needs of all types of investors.

DM = Developed Markets
EM = Emerging Markets

Source: Carmignac. ¹Across all Carmignac portfolios, as of 30/01/2023. The reference to a ranking or an award is not a guarantee of the future results of the fund or the manager. Morningstar Direct © 2023 Morningstar, Inc. all rights reserved. EUR Flexible Bond Class. EUROHEDGE AWARD 2019. Winner in the “macro, fixed income & relative value” category February 2020. Source and copyright : Citywire. Pierre VERLE and Alexandre DENEUVILLE are rated AA by Citywire for their risk-adjusted performance over a rolling three-year period for all the funds they manage as of October 31, 2022. Carmignac is rated “GOLD” in the “Bonds – Euro Corporates” category by Citywire for its rolling risk-adjusted performance, across the sector, over the period 31/12/2015 – 31/12/2022. Citywire fund manager ratings and Citywire rankings are the property of Citywire Financial Publishers Ltd (“Citywire”) and © Citywire 2023