IG versus HY
The balance between investment grade and high yield exposure has varied substantially: investment grade has ranged from less than half to nearly all of exposure.
“The perceived risk of the macro environment influences our decisions. When IG paper is cheaper, we can buy more. As spreads compress, we may find BB rated offers a better risk/reward,” says Docq.
Finding positive yields under ZIRP
Unlike some other funds, Allianz were disciplined in sidestepping negative yields before 2022. “During the period of negative interest rates, at one stage all senior corporate investment grade bonds out to 5 years were negative yielding and we just avoided them, even though our cash benchmark was also in negative territory. We instead managed to find some positive yields in BBB and crossover rated issuers offering a slightly positive return,” recalls Docq.
The fund would not entertain negative yielding paper for several reasons. It intends to hold until maturity and would generally not do a speculative short-term trade in the hope of profiting from “rolling down the curve”, partly because bid/offer spreads can eat up a lot of return in a shorter dated strategy. Leveraging at a more negative rate than the negative bond yield to try and extract a spread was also not feasible since, as aforementioned, the fund does not leverage its long book.
Incidentally, central bank asset purchases during the negative rates era have been of marginal importance. “The end of the European Central Bank’s ECB Corporate Sector Purchase Programme (CSPP) has not been especially relevant since most of the bonds owned were not eligible,” says Docq.
Rarely hedging rates
The fund does not normally take a non-consensus view on rates or the yield curve, partly because its duration exposure is so low anyway and any mark to market losses will usually be recovered within some months, or a year or two at most.
Opportunistic tactical strategies
The fund also runs some tactical and relative value strategies, but they are not always present because the opportunity set fluctuates.
One tactical strategy involves subscribing for new bond issues and selling them soon after issue. Incidentally, where monthly letters might show a 10-year bond this is probably a tactical new issue. New issue ‘flipping’ is quite counter cyclical. “Issuers generally need to offer a discount during challenging credit market conditions such as 2022. The discount is of course a moving target because there is a two-way feedback loop between primary and secondary markets: sometimes, new issues can reprice the secondary market,” observes Ploton. And sometimes the opportunity just disappears in both benign and challenging credit markets; there were no primary deals in the first week or so of April amid the tariff panic.
Cash versus CDS basis is another trade type with a somewhat intermittent opportunity set and it needs to heed the liquidity of single name CDS. “Liquidity is generally good for investment grade names but can vary a lot more for high yield. Cash versus CDS was used more previously when the fund was smaller,” says Docq.
Mean reversion and trend following trades on pairs of names are somewhat quantitatively based but also depend on the market regime and some fundamental bottom-up judgment. “If one sector is challenged, we do not want to play mean reversion,” says Ploton.
Mainly Eurobonds
The fund invests primarily in Euro denominated bonds. Even when other currency issues might appear to offer a premium after hedging back to Euros, the FX basis risk of fluctuating cross-currency swap spreads can eat up a lot of the yield for shorter dated paper. “The FX basis risk can change abruptly, especially at the front end, where there is also less of a credit spread that does not always compensate for costs of rolling hedges every one to three months,” points out Ploton. Euro-denominated bonds could include Eurobonds issued by US companies, such as cash rich Ford.
Additionally, the managers perceive that the extra return on UK or Nordic high yield as an illiquidity premium, which they would not take. “Specifically, the NOK and SEK bonds do not always meet our liquidity criteria of at least EUR 300 million of market capitalization and at least 7-8 dealer quotes,” explains Docq.
Risk limits survived Covid and 2022
The risk monitoring team can flag up potential breaches through a “shoulder tap” but this has not proved necessary so far. “Even in March 2020 and in 2022, the fund did not come close to its 2% volatility cap in terms of either forecast or realized volatility and easily paid some redemptions on time,” says Docq. Mark to market losses in 2022 were all recovered in 2023, which also benefited from a significant roll down and it was possible to reinvest in higher quality bonds at very cheap levels.
More value emerging
In early March 2025, European high yield credit spreads briefly touched the tightest levels since 2007, prompting the team to reduce exposure to some degree and add a small crossover index hedge. “The correction in risk assets, partly related to US tariffs and recession fears, is welcome in that better value can now be found at the front end,” says Docq.
Easy transition to SFDR article 8
On March 28, 2025, the fund transitioned to disclosing under the EU Sustainable Finance Disclosure Regulation (SFDR) article 8. This did not require any portfolio changes but will involve some more reporting of KPIs and DNSH (Do No Significant Harm) criteria. “We do not expect SFDR 8 will have any bad impact on performance,” says Ploton.
