In an environment characterised by geopolitical risks, persistent volatility and reduced clarity regarding central bank policy, it is essential to prioritise strategies capable of generating positive returns, regardless of the direction of the markets.
The benefits of management Absolute return
This is the case with management Absolute return, based on a high degree of diversification across assets, sources of return and financial instruments, without being constrained by a benchmark. Thanks to this flexibility and by leveraging a broad range of drivers of return, it is possible to enhance the decorrelation between asset classes, cushion potential market shocks and actively capitalise on upward trends.
This is the objective of our LBP AM Absolute Return Credit SRI fund, which is based on rigorous management of risk-adjusted return sources. The combination of several complementary strategies, such as exposure to sovereign debt, corporate bonds and opportunities in the primary bond market, aims to enhance return prospects whilst seeking to provide protection and reduce volatility.
Current position
In an uncertain macroeconomic environment, our stance remains cautious, with a preference for theInvestment Grade (IG). Indeed, the fundamentals of IG credit remain sound, and credit spreads are holding up in this segment. The primary market has picked up slightly in recent weeks, offering a premium, but volumes remain low in this volatile environment. At the other end of the spectrum, the primary market for High Yield has ground to a halt, and the mistrust evident in the private markets has begun to weigh on credit. Moreover, with the war in the Middle East, we are seeing valuations recover in the lowest-rated sectors. In light of these factors, we are adopting a selective approach to carry trades, whilst remaining cautious on the most cyclical sectors.
In the financial sector, fundamentals remain strong, underpinned by high returns and low default rates. Within our LBP AM Absolute Return Credit SRI fund, we have adopted a strategy focused on relative attractiveness, refocusing our attention on the Senior Preferred by the end of 2025, and we expect opportunities to arise soon in subordinated debt.
Regarding the securities High Beta (highly sensitive), carry trades remain attractive, particularly for diversified European banks, where the risk of capital or coupon loss appears limited. Nevertheless, valuations still seem high despite the recent correction.
Finally, on the interest rate front, European central banks stand ready to act in the face of persistent inflation, whilst the Fed is balancing growth against price stability. The market is already pricing in rate rises, and we are increasing our exposure to interest rates to capitalise on attractive yields, whilst maintaining international diversification into the UK and Australia.
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Disclaimer: Investing in the financial markets involves risks, including the risk of capital loss. The opinions expressed reflect the author’s views. LBP AM shall not be held liable for them under any circumstances. This information is provided for guidance only and, as such, does not constitute an offer to buy or sell any security, investment advice or financial analysis. Securities and sectors are cited by way of example. Neither their inclusion in the portfolio nor their performance is guaranteed. The fund involves risks, including the risk of capital loss, credit risk, interest rate risk, risk associated with holding securities with low or no credit rating, liquidity risk, risk associated with exposure to forward financial instruments, risks associated with discretionary management, overexposure and arbitrage, volatility risk, risk associated with contingent liabilities, sustainability risk, and risk associated with holding inflation-indexed instruments (up to 20% of net assets). For further information on its characteristics, risks and fees, please refer to the regulatory documents available at www.lbpam.com. Investors should note that the units/shares listed may not be available for sale in their country.