Edmond de Rothschild SICAV Corporate Hybrid Bonds has reached €100M of AuM. This new active, conviction-led fund managed by Alexander Eventon and advised by Marc Lacraz, invests mostly in hybrid corporate debt of non-financial companies from any geographical area.
In a context of low yield and high duration for Investment Grade corporate bonds, Edmond de Rothschild SICAV Corporate Hybrid Bonds seeks to take advantage of a fast growing asset class by benefitting from risk-adjusted returns from the universe’s mainly Investment Grade issuer profile. It aims at outperforming the ICE BofA Global Hybrid Non-Financial Corporate 5% Constrained Index, over 3 years, investing mostly in subordinated debts of non-financial corporates.
This type of debt offers a shorter duration profile than sovereign and unsubordinated corporate bonds, with a better actuarial yield mainly due to the additional credit premium. This additional premium linked to the complexity of the hybrid bond structure has allowed the hybrid corporate bond asset class to deliver a performance comparable to BB rated bonds over the past five years, all for an Investment Grade risk profile. In our opinion, it is therefore an interesting alternative to traditional and longer-term debt in a context of rising interest rates. The fund is registered as Article 8 under the SFDR regulation.
The fund management team employs a combination of discretionary and quantitative approaches with the aim to identify the most attractive hybrid issues, supported by a top down macro approach to express sectorial, regional and global macro views with the aim of reducing risks to fund performance.
“Our flexible approach can therefore lead to significant differences from the benchmark index always with the aim of producing superior returns”
“In line with the active and opportunistic aspects of the approach, we may take exposure to bonds across multiple regions/currencies and to a broad range of issuers rated both Investment Grade and High Yield”Alex Eventon, Lead Portfolio Manager
The investment team adheres to a disciplined approach to portfolio construction and monitoring, with the aim of cushioning severe market shocks. The majority of bonds are issued by Investment Grade issuers, which we believe reduces the risk of a loss of capital in market downturns. The process integrates risk-reward in portfolio construction and position sizing in absolute terms and in terms of overweight/underweight versus the reference index. Finally, the fund implements active hedging strategies, to limit exposure to risk, in line with our macro views. The fund’s flexibility is also reflected in the possibility of holding up to 10% of high yield issuers.
“This new fund is another example of our Group’s credit market strengths and our bond team’s focus on finding innovative solutions to the low yielding environment”.
“The fund’s investment team is integrated into a fixed income division of some twenty managers covering the main segments of the bond market”
“They are all dedicated specialists with track records in the space”Alain Krief, Head of Fixed Income
The asset class of non-financial hybrid corporate debt continues to evolve and grow, with a market capitalisation that is now above €200bn, from almost zero 10 years ago. The segment is now as large as the EUR HY corporate space. There were over €40Bn of new issuances in 2021. The issuer profiles are typically high quality companies with stable cash flows and solid credit profiles (typically IG). However, the return profile remains equivalent to that of High Yield corporates, close to an IG default risk. It is worth noting that there is increasing diversification in the universe, as new issuers expand the geographical and sectoral reach. Lastly, corporate hybrids sit in the sweet spot between the ultra low yielding and high duration IG segments, and High Yield – which is more volatile and presents a higher probability of capital loss.