Carmignac P. Credit: Letter from the Fund Managers - Q1 2026

Carmignac Portfolio Credit was down -1.01% (A EUR Acc shareclass) during the first three months of the years, outperforming by +13 bps its reference indicator which was down -1.14%.

The negative performance was mostly due to an increase in interest rates as well as a widening of credit spreads that were not fully compensated by the benefit of our hedges and the carry of the portfolio. We wrote in our 2025 annual letter about credit markets reaching end of cycle territory. We think we are now entering in this regime change, under the impulsion of several fundamental developments that we will detail below. Our prudent stance has served us well in this environment and we are maintaining it as we believe the current level of spreads is not pricing adequately the meaningful increase in the cost of risk taking place across credit markets.

The war in Iran and the associated energy and commodity shock is the main development since the beginning of the year. As markets gyrate as threats follow deadline extensions, we are reaching a point where the shock could start to unravel in a cascade of consequences, with multiple sectors of the global economy being deeply impacted. Few companies would be immune from a generalized energy shock. This said, we have had a constructive view on energy sector issuers, which have proven much more disciplined than in previous cycles, and have built a portfolio which should fare comparatively well in this context. Natural resources represent 20 to 25% of our exposure and we have done our best to avoid business models that are directly threatened by higher energy prices or sensitive to energy supply.

Another development of note since the beginning of the year is the rapid progress in coding capacities of the frontier AI models. This has caused a sea change in the valuation and evaluation of prospects of software companies. At this stage, we do not believe the software industry at large will fully unravel but it seems fair to assume established software businesses now have lower barriers to entry, which will impact their pricing power, their margins, their value and ultimately leverage their capacity. Software credits (more numerous in the US than in Europe) have faced a sharp repricing as a result. This has not affected us as we had negligible direct exposure to software. Companies that are more generally at risk of AI disruption tend to be asset-light service companies with undistinctive competitive advantages that our investment process tends to exclude (our philosophy is value based, focusing on hard to replace tangible and intangible assets and hard to assail barriers to entry).

The private world has also been rocked in the past quarter, especially private credit. Increasingly investors in this asset class are coming to grips with the excesses that have accumulated in this corner of the leverage finance universe resulting from the false tranquility induced by the artificially low volatility of private assets and the extraordinary influx of capital it attracted over the past decade. Now the credit quality and valuation of private funds are increasingly in doubt and the redemptions are mounting. Private debt funds are designed to curtail liquidity if they need to, but this means many companies will need to turn to public markets to refinance their balance sheets which will increase supply and widen spreads in the single B / CCC segment of credit markets. Carmignac Portfolio Credit has of course no exposure to private debt and this turn of events should be fruitful as we expect numerous interesting higher yielding opportunities will soon migrate to public credit markets.

We also see weaknesses building in the structured credit world as new CLOs have been launched for more than a year in conditions where the CLO arbitrage (generating a healthy return for the junior part of the CLO capital structure with returns from the loan book covering comfortably the cost of the senior tranches) required unrealistic levels of optimism. Misaligned incentives between CLO equity providers and managers have allowed this situation to fester but we think we are now reaching the point where dismal junior returns will freeze the CLO market. We have long seen this coming and our exposure is at its lowest point since the launch of the fund (c. 5.8% of the portfolio, focused on senior tranches of “old” healthy vintages).

Finally, we expect defaults will pick up in the public credit markets. Indeed, as we have commented in past fund updates, many of the excesses of the pre 2022 era have not yet been worked out. In multiple instances companies and their creditors have opted for temporary fixes under the guise of liability management exercises (LMEs) that do not address excess leverage. These LMEs have a bad track record and regularly evolve in hard defaults after a few years, and we expect to see more of these happen in the remainder of 2026.

Given this multiplication of issues, we think moves in credit markets have been contained and the current indices levels are not consistent with the buildup of fundamental risk. As a result, we have maintained and even deepened our defensive positioning. At the time of writing, Carmignac Portfolio Credit has c. 5% of cash buffer in addition to hedges on HY indices of c. 18.3%. The fund has a BBB rating (BBB+ if the hedges are considered) and a carry of 5.93%. We believe we have a minimal exposure to the weaker segments of the market.

This positioning has allowed us to resist well in the first quarter and crucially will allow us to seize opportunities as they appear in the coming months. 2024 and 2025 were high on animal spirits in the credit world but the tide is now turning on several fronts, and we believe we are close to the moment where we will be able to generate meaningful alpha as the markets come to terms with the developments we describe above. We have done our homework and positioned ourselves to be able to make the most of it and are very excited for future performance.