How we did in January: The fund returned between 0.4% and 0.8% across different share classes, compared to EUR HY (BAML HE00 Index) 0.6%, US HY (BAML H0A0 Index) 1.4% and EM sovereign credit (BAML EMGB Index) 1.1%. Performance in January, gross of fees in EUR, was: (i) Credit: 93bps, with 113bps from cash bonds and -20bps from CDS; (ii) Rates: 7bps; (iii) FX: -2bps, (iv) Equity: -16bps and (v) Other: 0bps.
What we are doing now: Overall, risk markets performed well in January, buoyed by the positive market sentiment in the US where data continues to remain strong, and CPI surprised to the downside. Hopes for a no landing of the global economy continue rising. The Fed kept policy unchanged with Powell stating that the FOMC is in no rush to cut, and the ECB cut rates by 25bp, as expected.
The end of January saw a pickup in volatility fuelled by increasing concerns over US Tariffs. Talk turned to action, with President Trump imposing tariffs on Canada (25%), Mexico (25%) and China (10%), only to then be postponed for Canada and Mexico on the back of ‘constructive’ talks. Retaliatory measures from China and potential tariffs looming over Europe and the UK will likely support higher volatility across risk assets.
In the current context of tight valuations, high uncertainty, and rising volatility, we continue to remain cautiously positioned. Rates have repriced since December and we used this to gradually increase our rates duration to 3.3y, however our net exposure remains low at ~49%. Our current yield to call is 6.3%. In credit, spreads remain tight, and we don’t find credit beta attractive. However, certain pockets offer value, and we focus on company-specific situations with tightening potential.
Our current positioning means we are well placed if a risk correction in 1Q25 materialises and have space to add risk in our cash book in this instance.
More in detail:
The Fund blended YTC is 6.3%.
The Fund duration is now 3.3y, as we gradually add to US duration post curve repricing.
We hold ~37% protection on tight global CDS indexes and single name CDS.
Net exposure in financials (incl. cash short and single name CDS) represents 31% of the book. The asset class outperformed strongly over the past twelve months. We remain constructive but reduce some of the winners. We remain constructive and have added to some longer duration positions in the US.
Net corporates exposure (incl. cash short and single name CDS) represents 37% of the book. We focus on high yielding bonds with limited exposure to market risk and a strong emphasis on catalysts. As a result, GCO corporate exposure has lower beta than corporate indexes and the rest of GCO book.
Net EM exposure (incl. cash short and single name CDS) represents 12% of the book. EM local is currently 4% of the Fund
Financial Credit Strategy
The new year started off strongly across most risk assets and geographies as increased confidence in monetary policy actions this year should backstop any economic weakness that could surface. Despite growing concerns around fiscal positions, the US remains an economic exception, which in turn buoys the market sentiment more broadly. Equity indices rallied on average 5.5%, with European indices outperforming US peers 7.5% vs 2.5% respectively. Credit indices rallied c5% and benefited from a less volatile month in rates with Core and Periphery sovereign curves largely stable (+/- 5bps).
Importantly, financials remained the clear standout winners with European and US banks’ equity +10% and +9% respectively. This percolated across the capital structure of European financials with the deeper more junior parts outperforming given their wider spread and higher yield levels; AT1s firmed up a 1pt and T2s were 20bps tighter, compared to 10bps for Seniors. In addition, the sector remains pinned in the spotlight due to ongoing M&A discussions which further enforces the relative attractiveness of the space from an investment perspective.
On the fundamental front, European banks have commenced reporting their 4Q / FY24 results in January with no significant changes in the core themes against prior quarters. Overall, gross operating income trends surprised positively as the erosion in net interest income was less than expected with banks demonstrating sustained fee income generation. Asset quality proved robust and barring a significant unexpected economic downturn, it should remain so with central banks now embarked on their rate cutting cycles. Capital repatriation via dividends and buybacks remains a key pillar of the sector and confirms the perceived resilience in the sector by the regulators, as opposed to other junctures in recent memory.
Primary issuance at just EUR70bn in January underwhelmed relative to its run-rate over the previous years, roughly 20% lower year-on-year. Across the capital structure, the bulk of the shortfall came in the secured space (-40% YoY in January) as the recent widening of spreads and greater issuance from SSAs made it more compelling for financials to print in the unsecured format (+45% YoY in January).
Issuers continued to bring forward their AT1 refinancing needs, resorting to in some instances tenders which have had between 60-70% acceptance rates as investors are keen to extend out the curve, especially in names that are well-liked. Importantly, spread compression continued across the financial landscape vis-à-vis other credit classes in Europe as the investment case remains compelling.
Financial Equity Strategy
FY24 reporting season is well under way for European Banks and so far, the key themes have been reassuringly familiar. First, 4Q profits have typically exceeded expectations, landing >5% above consensus. The quality of the results has also been good with the overwhelming majority of names reporting NII ahead of expectations, demonstrating that banks are so far successfully managing the reduction in interest rates better than expected. Meanwhile there has been no meaningful change of trend in asset quality with provision/NPL rates remaining extremely benign.
Secondly, management guidance for 2025 has also typically been reiterated or upgraded, and again has typically landed above the prevailing consensus. That has supported positive upward revisions in earnings expectations with sector consensus forward EPS now up a further 1% YTD (vs broader market modestly lower).
Finally, alongside the supportive fundamentals, nascent signs of a valuation re-rating are coming through – the sector has made a fast start to 2025, rallying c.15% YTD. Nevertheless, the prevailing 2026 P/E of c.7.5x, still offers 30-40% upside to the long run average. As the rate cutting cycle continues towards 2%, we do expect individual bank earnings performance to increasingly diverge over time, but at a high level we continue to see good value in the European bank space. The sector is forecasted to deliver mid-teen tangible book value per share growth over the next two years with a similar contribution on top from dividends – that leads to >25% ‘in-built’ value creation before the aforementioned re-rating opportunity.
Sustainable Equity Strategy
Market Commentary
January was a positive yet volatile month for global equities, with performance largely influenced by the first executive orders of President Trump and the latest macroeconomic developments.
In the U.S., macroeconomic data remained strong, with Non-Farm Payrolls significantly exceeding expectations. However, core CPI came in lower than expected at 2.3% YoY (vs. 2.7% consensus). This led the Federal Reserve to pause its interest rate cutting cycle, with projections now pointing to two additional rate cuts in 2025—reflecting the resilience of the U.S. economy.
Elsewhere, the ECB cut rates by 25bps as economic growth remained subdued, despite December inflation coming in at 2.4%, still above the long-term target. Meanwhile, the Bank of Japan raised its short-term policy rate from 0.25% to 0.5%, a level Japan has not seen in 17 years. In Italy, inflation remained below 2%, unemployment declined slightly, and industrial production showed mild signs of sequential improvement.
Portfolio performance
Algebris Sustainable World Fund was up 4.2% in January, while the MSCI MXWO Index (in EUR terms) was up 2.8%. The return for the month has been driven by the strong performance of EssilorLuxottica (leading global company in the eyewear and eye care industry), Cencora (major player in the pharmaceutical industry) and Thermo Fisher (leading provider of scientific instrumentation, reagents and consumables, software, and services).
In terms of portfolio activity, we secured new positions in i) Boston Scientific, a global medical technology company that develops and manufactures a wide range of medical devices, ii) United Rentals, the world’s largest equipment rental company, operating an extensive network of rental locations across North America, Europe, Australia, and New Zealand, iii) Sterling Infrastructure, leading player in the DC development, big infrastructure projects and reshoring. In Japan, we invested in Fujikura, a leading manufacturer of optical fiber cables and related products.
Strategy
The performance has been driven by our top-down fundamental approach due to several factors. First being the significant EPS acceleration in light of the remarkable resilience of the global economy especially for the ESG themes we play out. Secondly, inflation converging back towards its targets and ability to companies in our portfolio to keep strong gross margins and finally, strong FCF generation giving opportunities of M&A.
In terms of strategy, the Fund is a concentrated portfolio, investing in long-term quality growth companies, with strong competitive advantages, strong pricing power, significant barriers to entry, solid balance sheets and healthy free cashflow generation which they can reinvest and thus generate high return on capital employed.
Note: Index is used to illustrate the relevant asset class.
Global Credit Strategy
How we did in January: The fund returned between 0.4% and 0.8% across different share classes, compared to EUR HY (BAML HE00 Index) 0.6%, US HY (BAML H0A0 Index) 1.4% and EM sovereign credit (BAML EMGB Index) 1.1%. Performance in January, gross of fees in EUR, was: (i) Credit: 93bps, with 113bps from cash bonds and -20bps from CDS; (ii) Rates: 7bps; (iii) FX: -2bps, (iv) Equity: -16bps and (v) Other: 0bps.
What we are doing now: Overall, risk markets performed well in January, buoyed by the positive market sentiment in the US where data continues to remain strong, and CPI surprised to the downside. Hopes for a no landing of the global economy continue rising. The Fed kept policy unchanged with Powell stating that the FOMC is in no rush to cut, and the ECB cut rates by 25bp, as expected.
The end of January saw a pickup in volatility fuelled by increasing concerns over US Tariffs. Talk turned to action, with President Trump imposing tariffs on Canada (25%), Mexico (25%) and China (10%), only to then be postponed for Canada and Mexico on the back of ‘constructive’ talks. Retaliatory measures from China and potential tariffs looming over Europe and the UK will likely support higher volatility across risk assets.
In the current context of tight valuations, high uncertainty, and rising volatility, we continue to remain cautiously positioned. Rates have repriced since December and we used this to gradually increase our rates duration to 3.3y, however our net exposure remains low at ~49%. Our current yield to call is 6.3%. In credit, spreads remain tight, and we don’t find credit beta attractive. However, certain pockets offer value, and we focus on company-specific situations with tightening potential.
Our current positioning means we are well placed if a risk correction in 1Q25 materialises and have space to add risk in our cash book in this instance.
More in detail:
Net EM exposure (incl. cash short and single name CDS) represents 12% of the book. EM local is currently 4% of the Fund
Financial Credit Strategy
The new year started off strongly across most risk assets and geographies as increased confidence in monetary policy actions this year should backstop any economic weakness that could surface. Despite growing concerns around fiscal positions, the US remains an economic exception, which in turn buoys the market sentiment more broadly. Equity indices rallied on average 5.5%, with European indices outperforming US peers 7.5% vs 2.5% respectively. Credit indices rallied c5% and benefited from a less volatile month in rates with Core and Periphery sovereign curves largely stable (+/- 5bps).
Importantly, financials remained the clear standout winners with European and US banks’ equity +10% and +9% respectively. This percolated across the capital structure of European financials with the deeper more junior parts outperforming given their wider spread and higher yield levels; AT1s firmed up a 1pt and T2s were 20bps tighter, compared to 10bps for Seniors. In addition, the sector remains pinned in the spotlight due to ongoing M&A discussions which further enforces the relative attractiveness of the space from an investment perspective.
On the fundamental front, European banks have commenced reporting their 4Q / FY24 results in January with no significant changes in the core themes against prior quarters. Overall, gross operating income trends surprised positively as the erosion in net interest income was less than expected with banks demonstrating sustained fee income generation. Asset quality proved robust and barring a significant unexpected economic downturn, it should remain so with central banks now embarked on their rate cutting cycles. Capital repatriation via dividends and buybacks remains a key pillar of the sector and confirms the perceived resilience in the sector by the regulators, as opposed to other junctures in recent memory.
Primary issuance at just EUR70bn in January underwhelmed relative to its run-rate over the previous years, roughly 20% lower year-on-year. Across the capital structure, the bulk of the shortfall came in the secured space (-40% YoY in January) as the recent widening of spreads and greater issuance from SSAs made it more compelling for financials to print in the unsecured format (+45% YoY in January).
Issuers continued to bring forward their AT1 refinancing needs, resorting to in some instances tenders which have had between 60-70% acceptance rates as investors are keen to extend out the curve, especially in names that are well-liked. Importantly, spread compression continued across the financial landscape vis-à-vis other credit classes in Europe as the investment case remains compelling.
Financial Equity Strategy
FY24 reporting season is well under way for European Banks and so far, the key themes have been reassuringly familiar. First, 4Q profits have typically exceeded expectations, landing >5% above consensus. The quality of the results has also been good with the overwhelming majority of names reporting NII ahead of expectations, demonstrating that banks are so far successfully managing the reduction in interest rates better than expected. Meanwhile there has been no meaningful change of trend in asset quality with provision/NPL rates remaining extremely benign.
Secondly, management guidance for 2025 has also typically been reiterated or upgraded, and again has typically landed above the prevailing consensus. That has supported positive upward revisions in earnings expectations with sector consensus forward EPS now up a further 1% YTD (vs broader market modestly lower).
Finally, alongside the supportive fundamentals, nascent signs of a valuation re-rating are coming through – the sector has made a fast start to 2025, rallying c.15% YTD. Nevertheless, the prevailing 2026 P/E of c.7.5x, still offers 30-40% upside to the long run average. As the rate cutting cycle continues towards 2%, we do expect individual bank earnings performance to increasingly diverge over time, but at a high level we continue to see good value in the European bank space. The sector is forecasted to deliver mid-teen tangible book value per share growth over the next two years with a similar contribution on top from dividends – that leads to >25% ‘in-built’ value creation before the aforementioned re-rating opportunity.
Sustainable Equity Strategy
Market Commentary
January was a positive yet volatile month for global equities, with performance largely influenced by the first executive orders of President Trump and the latest macroeconomic developments.
In the U.S., macroeconomic data remained strong, with Non-Farm Payrolls significantly exceeding expectations. However, core CPI came in lower than expected at 2.3% YoY (vs. 2.7% consensus). This led the Federal Reserve to pause its interest rate cutting cycle, with projections now pointing to two additional rate cuts in 2025—reflecting the resilience of the U.S. economy.
Elsewhere, the ECB cut rates by 25bps as economic growth remained subdued, despite December inflation coming in at 2.4%, still above the long-term target. Meanwhile, the Bank of Japan raised its short-term policy rate from 0.25% to 0.5%, a level Japan has not seen in 17 years. In Italy, inflation remained below 2%, unemployment declined slightly, and industrial production showed mild signs of sequential improvement.
Portfolio performance
Algebris Sustainable World Fund was up 4.2% in January, while the MSCI MXWO Index (in EUR terms) was up 2.8%. The return for the month has been driven by the strong performance of EssilorLuxottica (leading global company in the eyewear and eye care industry), Cencora (major player in the pharmaceutical industry) and Thermo Fisher (leading provider of scientific instrumentation, reagents and consumables, software, and services).
In terms of portfolio activity, we secured new positions in i) Boston Scientific, a global medical technology company that develops and manufactures a wide range of medical devices, ii) United Rentals, the world’s largest equipment rental company, operating an extensive network of rental locations across North America, Europe, Australia, and New Zealand, iii) Sterling Infrastructure, leading player in the DC development, big infrastructure projects and reshoring. In Japan, we invested in Fujikura, a leading manufacturer of optical fiber cables and related products.
Strategy
The performance has been driven by our top-down fundamental approach due to several factors. First being the significant EPS acceleration in light of the remarkable resilience of the global economy especially for the ESG themes we play out. Secondly, inflation converging back towards its targets and ability to companies in our portfolio to keep strong gross margins and finally, strong FCF generation giving opportunities of M&A.
In terms of strategy, the Fund is a concentrated portfolio, investing in long-term quality growth companies, with strong competitive advantages, strong pricing power, significant barriers to entry, solid balance sheets and healthy free cashflow generation which they can reinvest and thus generate high return on capital employed.
Note: Index is used to illustrate the relevant asset class.