PROMOTIONAL Document intended for professional investors. This is a commercial communication. It is not a contractual document. Please refer to the Prospectus, the Key Investor Information Document (KID) and the most recent report and accounts of the fund and do not base any final investment decision on this communication alone.
For several months, fixed income markets have been caught in the crossfire of global events. On the one hand, the sharp rise in inflation – accentuated by the war in Ukraine – is pushing central banks to tighten their monetary policy. (The SNB and the ECB raised their key rates by 50 basis points in June and July, respectively, following the Fed's lead.) On the other, this rapid monetary tightening – coupled with the risk of a gas crisis in Europe – is rekindling fears of a recession.
These two issues are putting pressure on fixed income markets. Until mid-June, the predominant trend was for rates to rise. For example, the Swiss 10-year rate reached as high as 1.60% on June 16, compared to -0.13% at the end of 2021. After that, the theme of the global economic slowdown took hold again in the sovereign segment, bringing the same rate down to only 0.40% at the end of July 2021.
Spreads on riskier borrowers remain relatively high. In this turbulent environment, it is therefore important to be highly responsive and to use several complementary strategies.
Strategy 1: Opt for a negative modified duration
In the event of an anticipated rise in rates, it is important to be able to build a ‘negative modified duration’ portfolio. This technique makes it possible to take advantage of an upward movement in rates, which is usually unfavourable for fixed income assets. In our opinion, this strategy should be favored in certain market segments to respond to inflationary pressures and monetary tightening.
Strategy 2: Opt for inflation-linked bonds (‘linkers’)
The current environment also seems to us to remain favourable for inflation-linked securities. German linkers offer an interesting profile because Germany is one of the main issuers of this type of security on the European markets, while being particularly affected by the inflationary movement.
Strategy 3: Focus on short-dated high-yield bonds
Among the other segments to be favoured, our preference is for high-yield bonds, which are certainly riskier than investment-grade bonds, but offer more attractive yields. The risks remain moderate: the default rate for high-yield companies remains very low, having reached only 1.7% over 12 months in Europe at the end of June 2022, according to Moody's. It remains important to favour short-dated issues to protect against market rate volatility. In recent months, some Investment Grade securities have also regained an attractive profile.
Strategy 4: Turn to financial subordinated debt
In the same spirit, we like the financial subordinated debt segment (AT1, Tier 2), while remaining relatively cautious. These securities, issued by European banks, also offer an additional yield, which can be around 8% per year [1]. European banks have a very low risk of default because they are well capitalised, but these securities are sensitive to spread widening, which implies giving them a reasonable weighting in a diversified fixed income portfolio.
Strategy 5: Remain mobile in your asset allocation choices
Finally, the rapid evolution of the economic situation requires us to remain very mobile with regard to these different strategies. Managing modified duration means being able to rapidly increase or decrease the portfolio's duration according to changes in economic expectations. The asset allocation itself must remain very flexible. This mobility can also be achieved through overexposure or underexposure to some currencies.
These different approaches are currently implemented in the Lazard Credit Opportunities fund in order to take advantage of the best opportunities in the market.
1 Source: Bloomberg, as of August 1, 2022.
Article written as of August 1, 2022, for the exclusive use of financial professionals. This is a financial promotion and is not intended to constitute investment advice. The opinion expressed above is current as of the date of publication, but is subject to change.
Lazard Credit Opportunities is a fund incorporated under French law, authorized and regulated as a UCITS by the French markets regulator (“Autorité des Marchés Financiers”) and actively managed by Lazard Frères Gestion SAS. The management objective is to get, over the recommended investment period of 3 years, a performance net of fees higher than that of the following reference indicator: €STR Capitalised +2.00% (PC share). The benchmark is expressed in EUR. Risk level: 4 on a scale of 7. Main risks: risk of capital loss, risk linked to discretionary asset allocation, interest rate risk, credit risk, counterparty risk, exchange rate risk, risks linked to emerging markets.
Investment objective: aims to achieve, over the recommended investment period of 3 years, a performance net of fees higher than the following benchmark: €STR Capitalised + 2.00%. The benchmark is expressed in EUR.
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