Eclectic process
The process includes macroeconomic, fundamental, quantitative, legal and technical analysis, as well as governance and ESG.
Macroeconomic input
The Economic Outlook Committee (EOC) may encourage Candriam to take a long or short position in a particular sector. For instance, in mid-2024 banks were appealing. “Given the changes in rates and economic environment, some sectors benefit more than others when rates increase. For example, the financial sector tends to benefit from a rising rates environment,” says Zeenni.
Fundamental
The strategy does not expect to own any defaults on the long side, and it is not trading distressed debt. Potentially stressed issuers are closely monitored. If an issuer curve is inverted, it can mean there is uncertainty over refinancing. “This would normally be scrutinized by our fundamental analysis, considering the outcome of the analysis and the market, we may take a view on this event,” says Zeenni.
Technicals
Candriam are aware of market sentiment and do pay attention to technical factors. “We look closely at market technicals to inform our market decisions,” says Zeenni. Candriam uses position level stop losses and has always been able to close out CDS, where the volume of derivatives can exceed cash bonds on some names.
Quantitative
Quantitative research is carried out on all issuers, and Candriam’s CQS model has been used since 2022 for listed corporate investment grade issuers in developed markets. “CQS is specifically designed to provide a credit ranking for high investment grade names, and predict upgrades or downgrades for other names,” says Zeenni. Candriam is expanding CQS coverage of names. Other quant models include the “Stock to Spread” model, which supports fundamental analysis.
Governance and legal
Governance analysis is done at issuer level, while individual instruments are also assessed for security quality based on criteria such as covenants. In practice there is some correlation between the issue and instrument assessment. “A governance controversy may potentially have an impact on the yield, price and spread of a bond,” points out Zeenni.
ESG and sustainability
Exclusions at Candriam vary with SFDR reporting categories and asset classes. “Depending on the SFDR classification of a fund, a bigger part of the universe will be excluded to comply to our ESG criteria, which may also evolve over time. The sustainable investment policies also vary between equity and fixed income products, therefore some companies that are excluded from the fixed income investible universe may not be from the equity one,” says Zeenni.
Since March 15th 2024, Candriam Long Short Credit has reported under SFDR Article 8. This currently excludes issuers below Candriam’s ESG “6” rating or that are rated as “OUT” for governance. The exclusions apply at issuer level for both long and short positions.
Extra work is needed to assess private companies: “When we do not have enough data from a private issuer we may contact them in order to complete the analysis, or the data gaps can be considered in the final result of the issuer analysis,” says Zeenni. Candriam also has an extensive corporate engagement program engaging with both private and public companies bilaterally and collaboratively.
ESG and credit indices
ESG policies also effectively limit the quantum of exposure to traditional credit indices that are not ESG compliant.
While some asset managers do carve derivatives out of their ESG policies, Candriam’s view is that the maximum exposure to non-sustainable investments criteria should also apply to credit index derivatives. “The fund does not employ index futures however we do have positions on derivatives such as CDS and CDX. As an Article 8 fund, with a minimum percentage of sustainable investments, we cannot ensure that the index complies with our ESG criteria. Therefore, credit derivatives are limited to the non-sustainable investment percentage limit,” explains Zeenni.