The global investment grade credit universe (GIGC) far exceeds local submarkets in size and scope and a GIGC strategy may unlock value through diversification and currency inefficiencies.
Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®.
This conversation features highlights from an Investment Perspective created by Wells Fargo Asset Management called Going global: The world of active global credit strategies.
Today, we’re talking with its authors, Henrietta Pacquement, Senior Manager and Head of Investment-grade Europe on the WFAM Global Fixed Income team, and Scott Smith, Senior Portfolio Manager and Head of Multi-Sector Investment-grade on the WFAM Global Fixed Income team.
Welcome to the program, Henrietta.
Henrietta Pacquement: Thank you for having us, Laurie.
Laurie: And thank you for joining us, Scott.
Scott Smith: Happy to be on the program. Appreciate it.
Laurie: To start off our conversation, I wanted to bring to our audience’s attention that not only did you both author this paper, but you are also co-lead portfolio managers on the Global Investment Grade Credit strategy. Could you provide a little background on this new strategy?
Henrietta: So the Global Investment Credit strategy is really a much-needed addition to our product lineup.
With this strategy, we’re bringing together two long-term investment-grade track records. So, as well as managing the Global Investment Grade Credit strategy, Scott manages the dollar-denominated investment grade portfolios in San Francisco. And he’s been doing that for over 30 years now.
And here in London, I’ve been managing European investment grade strategies for over a decade. So we’ve now been working together for the last three years, and that collaboration culminated in the launch of our first Global Investment Grade strategy in March 2019.
Laurie: Thank you for that, Henrietta. Now getting into the paper and digging a little deeper into the strategy, can you describe the global investment grade credit universe and why you chose to build a strategy around it?
Scott: Sure. So I think the best way to describe the universe is to provide some general characteristics of the actual benchmark for the strategies.
So the benchmark for this strategy is the Barclays Global Agg Credit U.S. Dollar, hedged. And perhaps the most important characteristic or easiest way to understand that benchmark is by looking at the currency allocation.
So, specifically, that benchmark is 65% U.S. dollar investment grade credit, 25% euro investment grade credit, 5% sterling, and 5% other. So while 90% of the index is comprised of U.S. dollar high grade and euro high grade credit, there’s actually 14 other currencies that issue within this benchmark, as well.
And one of the specific benefits in particular for our team, because of our focus on credit research and bottom up security selection, is just the fact that we have a much larger opportunity set to filter for high conviction security selection opportunities. So really the bottom line here is we’re filtering the universe that is two- to three-times larger than you would have in just the local market opportunities and strategies.
Laurie: And in the paper, you highlight three things—security selection, currency allocation, and yield-curve allocation—as ways to potentially drive more alpha and unlock value. Could you go into more detail on each of these?
Henrietta: So in regards to security selection, it really is the primary focus of the strategy, and it’s a key part of our investment process.
So security selection is done in close partnership and collaboration with the 30-member global credit research team.
Each individual security is supported by in-depth fundamental analysis, including a full ESG review. And we really feel that that’s the cornerstone of risk management and lays a good foundation for competitive risk-adjusted income over time.
So our research analysts maintain active credit recommendations on the large universe of corporates that we follow. They communicate their credit opinions and their high conviction ideas to the investment team.
Portfolio managers then filter these recommendations and reconcile them with what we think the current market themes are, what the spread and yield profiles of the individual issuers are, what our portfolios look like, and what kind of risk profile we want to have at a given point in time.
Scott: So in regard to currency allocation—I think just to make sure everybody understands—first off, the strategy is not taking outright currency bets relative to the benchmark and everything is hedged back to the U.S. dollar.
What we are doing is optimizing which currency we extract risk from for issuers that issue in multiple currencies. We also do have the ability to diversify our yield curve exposure, and I think this can be very beneficial.
It can be alpha-generating, also risk-reducing, but also I think it’s becoming more of a topic here as negative yields are once again dominating the global landscape.
Laurie: And can you let listeners know how your team is constructed and why that’s a good thing for your strategy’s approach?
Scott: As mentioned, Henrietta and I are the lead PMs [portfolio managers] for the strategy.
Collectively, we have 16 investment professionals on our team. Ten of those are in the U.S.; six are in London.
The broader team also brings a wealth of experience, so on average, the team has 17 years average experience.
And I think a big competitive advantage for us is the fact that we are supported by the continuity of a truly global credit research resource that’s headed by Jamie Newton. Jamie has 33 research analysts that report to him. Those are balanced between both the U.S. and London, and it’s really a critical foundation for a strategy that relies on bottom-up security selection and credit research as a primary source of alpha.
Laurie: Before we close out today’s program, can you share some parting thoughts for investors interested in global investment grade credit?
Henrietta: I think, for investors, our investment process and our investment philosophy, and really our focus on risk-adjusted performance and well-underwritten bonds, allows us to take advantage of market inefficiencies and produce balanced global portfolios over time.
Laurie: Thank you for all your insights today, Henrietta and Scott. To our listeners, you can find the full Investment Perspectives paper by visiting https://www.wellsfargoassetmanagement.com. But for now, let’s wrap things up for today. We appreciate your time on the program, Scott and Henrietta.
Scott: Yes, no problem. Thank you, Laurie, for having us.
Henrietta: It was a pleasure to be here.
Laurie: Until next time, I’m Laurie King; take care.