Manager Update – Q1 2024

The fund performed well relative to the index over Q1. What were the main contributors and what detracted?

Sarah Harrison: After the relentless rally that we saw in the fourth quarter of 2023 in which global high yield returned close to 7%, the first quarter of 2024 was relatively benign in comparison with index returns of just over a percent and a half. We benefited from our income orientation and bias to carry over convexity. Positioning in the TMT (Technology, Media, and Telecommunications) space was a significant contributor to our outperformance, including, firstly, the decision to be overweight cable versus underweight wirelines, and secondly, security selection within these two sectors. Underweight positions in potential default candidates in Europe also significantly contributed to performance. The main detractor for us from a sector perspective was our long-held underweight to real estate. Real estate will be one of the biggest beneficiaries of a lower rate environment but remains a sector where idiosyncratic issues abound.

Several issuers experienced price volatility due to governance reasons last quarter. How does the investment approach help to identify and avoid exposure to these names?

Sarah Harrison: In addition to our climate transition framework, which we have applied across our climate transition credit suite for more than three years, we at Allspring have developed a proprietary framework to assess ESG (environmental, social, and governance) risk called ESGiQ. It is used across all Article 8 funds and ESG-integrated strategies, including non-climate-oriented strategies. The focus of ESGiQ is understanding how ESG risk may impact operating performance and, subsequently, bond prices. As you can imagine, assessing governance is an important part of the process for high yield investing. High yield companies tend to be more opaque than your average bond issuer and by carefully assessing governance risk, we have sidestepped many of this year's landmines so far.

Where do you see the opportunities in global high yield markets and how are you positioned to capture them?

Sarah Harrison: The Plus Fixed Income team at Allspring employs a six-month horizon to identify catalysts and anticipate inflection points. With the expectation of a pickup in transaction activity later this year, there'll be more opportunities to layer an event-driven approach to our fundamental credit analysis and relative value-driven investment process. This is led by our 70 person plus Global Fixed Income Research team. A resurgence in IPOs (initial public offerings) will provide the potential for early repayment, a resurgence in LBOs (leveraged buyouts) will provide new interesting high coupon primary market investment opportunities, and a resurgence in M&A (mergers and acquisitions) will provide opportunities to identify candidates for acquisition by large, higher-rated strategic buyers.

The portfolio is currently overweight Europe vs. the U.S. What drove this decision: your climate objective or performance objective?

Sarah Harrison: The decision to be overweight Europe versus the U.S. is primarily a result of valuation rather than climate considerations. Being an Article 8 fund, we are very carefully balancing both financial objectives and climate objectives. From a performance perspective, we view Europe as being more attractive than the U.S. when you factor in, firstly, today's spread differential between the two versus historical averages and, secondly, favorable hedging costs. While the U.S. is behind Europe in some respects with regard to progress on company-specific decarbonisation, we have seen steps in the right direction recently, particularly with the approval of the SEC's (U.S. Securities and Exchange Commission) long-awaited Climate Risk Disclosure ruling.