Manager Update – Q1 2024

How did the fund perform in Q1? What worked well and what didn’t?

Henrietta Pacquement: The first quarter of 2024 witnessed tighter spreads and higher interest rates, leaving global investment grade credit markets close to flat year-to-date. In that context, the Climate Transition Global Investment Grade Credit Fund I Share Class outperformed its benchmark by 62 basis points, driven by security selection. So, what worked? Higher all-in yields are attracting investors to the asset class, facilitating refinancing activity that has in turn been seen as a vote of confidence from investors, allowing spreads to tighten. We had a modest spread advantage against the benchmark, which served us well this quarter. We saw positive security selection effects from banking, consumer cyclicals, and real estate. Our dry powder in Treasuries detracted from performance, but we don't see that as an issue as it brings flexibility to the portfolio.

What were the interesting developments in the portfolio over the quarter?

Henrietta Pacquement: New issuance has been prolific as U.S. issuers in particular have frontloaded supply ahead of the election cycle later this year, feeding investor appetite. Demand for deals has been elevated with books up to seven times done. We use the opportunity to consume some of our Treasury positions and rotate select real estate positions that had rallied strongly into consumer non-cyclicals and technology. We also trimmed a modest amount of euro-denominated credits and recycled them into dollar-denominated names as relative spreads have compressed between currencies.

Credit spreads have been relatively tight over the period. Where do you see the opportunities in global investment grade credit markets and how are you positioned to capture them?

Henrietta Pacquement: Now, the welcome readjustment post December's market exuberance in the interest rate markets is allowing investors another bite of the cherry. Yield curves across most jurisdictions are now back to more sensible levels and we expect them to continue to be range bound going forward as we get more inflation and growth data points. Looking at spread markets, they are pricing the benign economic environment that we're in and have tightened even as rates have risen year-to-date. A welcome change to the behaviour we saw over the last couple of years. So, where does that leave us? While spreads are tight, all-in yields are attractive and the normalisation of the yield curve will likely generate strong total returns in the intermediate part of the curve.

The portfolio is currently overweight Europe versus the U.S. What drove this decision: climate or financial considerations?

Henrietta Pacquement: So, we balance climate and financial considerations when constructing portfolios. Top-down allocations, such as currency of denomination, are driven by relative value assessments that include both valuation and technical considerations. Having been tilted to Europe in 2023, we're now more neutral given the opportunity set.

Finally, a word on COP 28. With some time now passed, what are your main reflections on what was achieved in Dubai?

Henrietta Pacquement: This is actually a controversial question. Now that time has passed, I still think the result is momentous. For the first time in 30 years, most of the globe has agreed to move away from fossil fuels. Now, obviously, we have a lot to do to make that happen, but it's a big step forward. The other takeaway for me is the notion of transition traps. I think this is an underestimated issue that needs to be taken into consideration when designing portfolio guidelines.