Credit was a strong contributor to performance within Carmignac’s Funds in the last few years
What is behind this successful management?
With roughly €15bn(1) invested in credit and structured credit markets throughout our funds, the credit team plays a key role at Carmignac. Our unconstrained approach, characterized by our completely non-benchmarked, active, flexible and opportunistic management was primordial in the recent success. We pick up securities where we see value. These typically fall out of traditional credit investors’ mandate or require a combination of skills that our team is endowed with, and that few credit investors have.
The credit skills are numerous in the team as we cover investment grade, high yield corporate bonds and structured credit. We are happy to have a small and tight-knit team that embodies the entrepreneurial spirit we share within the firm. However, it is absolutely key to understand that this team is not isolated within Carmignac as all our investments benefit from the expertise of the whole fund management team.
The knowledge we have internally in the investment team is extraordinarily diversified and credit analysts work on every situation with specialized teams: European equities, emerging market equities, sectors and commodities specialists. We combine their insight, experience and understanding of markets with our credit skills set to optimize our investment decisions.
What are the key features of your investment process?
Our credit expertise comprises a strong bottom up analysis, completed by our macro scenario and strengthened with a strong set of technical skills on credit instruments. It might sound corny but we have a real passion for understanding business models, capital structure and complex features of securities. Our continuous interactions with equity sectors specialists combined with an access to top managements, consultants and sell-side analysts is second to none.
Furthermore, the credit team also benefits from our in-house understanding of global macro trends. Our daily interactions with the rest of the fixed income team and the cross asset team allow us to direct our attention to promising regions and sectors, and to unearth the most attractive opportunities offered by credit markets. Last but not least, we have gathered very strong technical skills on credit instruments. Strong technicality gives the team an edge to maximize returns and to pursue alpha even in expensive markets.
How would you illustrate your unconstrained approach to credit markets?
What we did on the commodity sector in January and February 2016 is a concrete and clear example of our opportunistic approach helped by the interactions we have within the investment team. We had been monitoring oil and gas credit for a very long time. It used to represent 20% of the US high yield market 3 years ago, but we didn't participate because we weren’t comfortable with how long those business models would survive given an oil price below $60/barrel. When oil prices collapsed at the end of 2014, we went to Texas, attended seminars and did research to value oil and gas assets. But still, we didn't see the US high yield energy sector as particularly enticing.
However, a bit more than a year later, in January 2016, the situation had to be reassessed as credit investors had completely capitulated after 18 months of bear market. A round of very aggressive downgrades from rating agencies had taken place, forcing some accounts to sell and very few investors were able to add to their positions. This is when we bought bonds issued by Freeport, Anadarko and Murphy Oil, companies we had monitored for months, as we had been waiting for downgrades/forced selling. The downside was in our view very limited, the upside was excellent and the timing was right. We were prepared and ready, whereas it took time for most other players to react.
Being unconstrained allows us to go further when looking for performance drivers by buying out-of-the-mainstream securities where we see value. With a key risk of rising interest rates, 2017 calls again for a flexible and unconstrained bond management, to find attractive investment opportunities on a global scale. We could not emphasize enough that our agility and global perspective allow us to seize opportunities as we did recently in the financial, commodity and structured credit spaces (more information in the second chapter of this note dedicated to credit outlook).
Our unconstrained approach enables us to navigate credit markets against the consensual flow
Pierre Verlé, Head of Credit
Pierre Verlé has 13 years of experience in credit markets. Before joining Carmignac, Pierre Verlé co-managed the distressed debt fund at Butler Investment Managers in London and was in charge of special situations investments for France and Benelux at Morgan Stanley. A former student of the Ecole Polytechnique (economics and mathematics applied to finance), Pierre Verlé holds a Master's degree in finance from HEC. Pierre Verlé is a CFA and CAIA charterholders.