How we did in November: The fund returned between -0.33% and -0.12% across different share classes, while EUR HY (BAML HE00 Index) returned 0.5%, US HY (BAML H0A0 Index) 1.1% and EM sovereign credit (BAML EMGB Index) 0.8%. Performance in November, gross of fees in EUR, was: (i) Credit: 84bp, with 1.1% from cash bonds and -29bps from CDS; (ii) Rates: -7bps; (iii) FX: -2bps, (iv) Equity: -95bps and (v) Other: 0bps.
What we are doing now: We maintain a cautious approach to both global duration and credit markets. In November, global rates tightened, and credit spreads kept hovering around tightest levels of the year. We see limited value in both areas and see scope for volatility to pick up as we enter 2025.
Resilient US macro will continue to be a challenge for global rates. In US, healthy labor markets and sticky service inflation means a pause in cuts is in the cards. In Europe, the economy and inflation are softer, and the ECB may step up the pace of cuts, but a sustained divergence of European rates would translate into further Euro weakness, unwelcome by the central bank. As a result, we keep cautious on both curves.
In the US, the new administration takes office in January, and policy scenarios are wide open. A combination of tariffs, loose fiscal policy and a more cautious Fed could weigh on rates and risk at the same time. In this environment, we keep duration low and keep a high bar for new longs in our credit book.
Our credit beta is the lowest since 2022, off a combination of low net exposure and reduced weight in higher beta segments, such as financials and emerging markets. Our duration is 2.2y. Our yield to call is 5.6%. Our current positioning means we benefit from a correction in rates and risk in 1Q25 and have space to add risk in our cash book in this instance.
Macro uncertainty will remain incredibly elevated in 2025, translating into persistent volatility across rates and credit. We strongly believe a flexible and reactive approach to fixed income will continue to make a difference.
More in detail:
The Fund blended YTC is 5.6%.
The Fund duration is now 2.2y, on the low side of our historical range.
We currently run ~10% cash allocation, the highest in the past three years. We hold 42% protection on tight global CDS indexes.
Net exposure in financials (incl. cash short and single name CDS) represents 29% of the book. The asset class outperformed strongly over the past twelve months. We remain constructive but reduce some of the winners.
Net corporates exposure (incl. cash short and single name CDS) represents 35% 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.
Note: Indices are used to illustrate the relevant asset class.
Financial Credit Strategy
November turned out to be a constructive month for risk assets despite the cautious tone in markets going into the US elections driven by concerns around the potential un-anchoring of long-end US rates. For the time being, the market seems to be giving some benefit of the doubt to a more dovish US policy overall despite what undoubtedly seems like a more hawkish current stance around tariffs. Early indications with respect to geopolitical and trade developments are apprehensively positive but the new administration has yet to be sworn in and the impact of future policies is unknown.
US markets outperformed broader equity indices, rising c7.5% on average to YTD gains of c25% with the banking sector the clear stand-out, +14% MoM to +48% YTD. This was in sharp contrast to Europe where ongoing macroeconomic weakness and geopolitical concerns are weighing on equity markets; EuroStoxx was unchanged on the month, +10% YTD, with European Banks -1.5% MoM to end +27% YTD. That said, European financials’ credit performance decoupled from equities with spreads up to 5bps tighter across the capital structure and AT1s +50c, in part driven by 15-25bps tightening across European rates’ curves.
European banks wrapped up their 3Q24 results season with no material surprises from the peers that had reported in the previous month. The standout, and surprising, trend is that lower interest rates are not yet translating into operating income headwinds as banks are proving quite resilient in tapping other sources of revenues away from net interest income. Furthermore, concerns around asset qualities have been put on the backburner once again as the little deterioration that materialised was largely insignificant although forward guidance needs to be monitored given what is expected to be a slowdown in economic activity.
Away from results, European financials landscape benefited from further positive developments along the M&A and ratings uplift fronts. In Spain, BBVA’s approach for Sabadell might have to take another 6-months as the process was pushed into a second phase where a more detailed analysis will need to be undertaken. In Italy, several fronts were opened which highlight how ripe the sector remains for further consolidation as the easier income uplift from higher rates is coming to an end.
Primary activity roared back in November with EUR70bn issuance some 25% higher than last year and mainly concentrated (c55%) in the secured format. Interestingly, it was the busiest month for capital going back at least 6 years with 18 new securities totalling EUR14bn as issuers opportunistically took advantage of market levels and investor appetite. Our participation in these trades has become more discerning given some of their idiosyncratic features such as historically low reset rates for given issuers.
Financial Equity Strategy
In November, US banks rallied strongly in the wake of a presidential victory by Donald Trump and a Congressional sweep by Republicans. Large and small banks finished the month up 13% and 14%, respectively, while the S&P 500 advanced about 6%. Notably, post a surge on the day following the election, large banks were up just another 2%, which was in-line with the overall market, while small banks were flat. As we have written previously, there are numerous potential tailwinds for US banks under a Trump administration; these include a more favorable regulatory environment, increased M&A activity, higher levels of capital return, stronger loan growth alongside economic expansion, and a steeper yield curve. However, the size and speed of the rally, and resulting P/E expansion to levels above historical long-term averages, clearly has embedded at least some of these potential catalysts. Furthermore, it is important to compare these levers to current estimates in gauging further potential upside. Regarding loan growth, for example, consensus already expects roughly 4% growth in each of the next two years which would be a notable acceleration from the flattish growth the banks have been putting up over the last 18 months. Interestingly, post Trump’s first win in November 2016, annual loan growth of the big banks slowed from prior years – 6% in 2014, 8% in 2015, and over 6% in 2016 – to less than 4% in 2017; while there were other dynamics at play, such as rates coming off of the zero bound at that time, it is not a foregone conclusion that Trump’s policies will stimulate outsized growth. In terms of the impact of a new regulatory regime, it is quite plausible that new personnel will lead to a finalized Basel III Endgame that is capital neutral to the group overall (though the GSIBs are likely to see some increase). This would be welcome news given banks would have more flexibility to lend and return excess capital via buybacks; however, consensus is already calling for many large banks to increase payout ratios to near 100% and retire 5-10% or more of shares by the end of 2026 (not to mention that valuations are at levels deemed unattractive for buybacks by some such as Jamie Dimon at JPMorgan). A steeper curve would certainly be beneficial to most banks all else equal, especially after the earnings pain caused by the lengthy inversion of the last two years. Here too, though, estimates are already reflecting at least some of this benefit, especially those most positively geared to a steeper curve. For instance, numerous banks are expected to see 15-20% expansion in the run-rate of their quarterly net interest income by 4Q26 vs. current levels (with small banks even higher). Lastly, cost of risk is expected to stay benign with 2025 in-line with 2024 levels before improving from those already low levels in 2026.
To be clear, we are not suggesting that the expected catalysts under Trump will not play out, and that may not be further upside estimates and the stocks. To that point, we continue to own shares in banks that we believe are positioned well, both for idiosyncratic reasons and also relative to the likely environment under this administration. Additionally, M&A activity is likely to pick up, and indeed there already has been an increased pace of smaller deals. We expect that owning well-positioned strong buyers will be a sound strategy this cycle, and we are also focused on owning small banks with valuable deposit franchises. Overall, however, we believe some caution is warranted after this rally and have rotated some of the fund to segments offering more clear value such as US life insurance.
For all the talk about US M&A surging post the election, we have yet to see much in the way of meaningful transactions yet – except in Europe, where deal activity has truly taken off. Following the activity from BBVA and UniCredit in Spain and Germany respectively, November brought more action in European financials M&A with UniCredit placing a bid on domestic peer Banco BPM, and then in the UK, Aviva placed no fewer than three bids in a week to force the hand of the board at Direct Line. We are shareholders of both targets, and think UniCredit will have to similarly up its bid but expect this to play out over the next several months. Direct Line was perhaps the more notable deal as unlike the bank deals, Aviva is paying a very meaningful premium (over 70%), and yet the acquiring stock is still performing fine (roughly flat since announcement). The market is clearly in favor of the deal for Aviva, viewing it as a sensible strategic and financial transaction that should provide significant earnings accretion. We would be quite surprised if there were not similar deals in the insurance space, particularly in the small/midcap arena where we have concentrated our exposures.
Sustainable Equity Strategy
Global equity markets have been strongly up in November, with MSCI World index (in EUR terms) up 6.9% (YTD +25%).
Algebris Sustainable World Fund was up 5.2% in November, bringing YTD return to +14%. The return for the month has been driven by the strong performance of Copart (global company that provides online vehicle auction and remarketing service), McKesson (US company which distributes pharmaceuticals, medical-surgical supplies, and health and beauty care products throughout North America) and Vertiv (leading AI infrastructure player with sustainable competitive differentiation in data center power and thermal management).
In terms of portfolio activity, we started on nVent, which designs, manufactures, markets, installs and services high performance products and solutions that connect and protect sensitive equipment, buildings and critical process. We also added SPX Technologies, global supplier of infrastructure equipment with scalable growth platforms in heating, ventilation and air conditioning (HVAC), detection and measurement, and engineered solutions.
The performance has been driven by our top-down fundamental approach due to 1/ significant EPS acceleration in light of the remarkable resilience of the global economy especially for the ESG themes we play out, 2/ inflation converging back towards its targets and ability to companies in our portfolio to keep strong gross margins 3/ 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 November: The fund returned between -0.33% and -0.12% across different share classes, while EUR HY (BAML HE00 Index) returned 0.5%, US HY (BAML H0A0 Index) 1.1% and EM sovereign credit (BAML EMGB Index) 0.8%. Performance in November, gross of fees in EUR, was: (i) Credit: 84bp, with 1.1% from cash bonds and -29bps from CDS; (ii) Rates: -7bps; (iii) FX: -2bps, (iv) Equity: -95bps and (v) Other: 0bps.
What we are doing now: We maintain a cautious approach to both global duration and credit markets. In November, global rates tightened, and credit spreads kept hovering around tightest levels of the year. We see limited value in both areas and see scope for volatility to pick up as we enter 2025.
Resilient US macro will continue to be a challenge for global rates. In US, healthy labor markets and sticky service inflation means a pause in cuts is in the cards. In Europe, the economy and inflation are softer, and the ECB may step up the pace of cuts, but a sustained divergence of European rates would translate into further Euro weakness, unwelcome by the central bank. As a result, we keep cautious on both curves.
In the US, the new administration takes office in January, and policy scenarios are wide open. A combination of tariffs, loose fiscal policy and a more cautious Fed could weigh on rates and risk at the same time. In this environment, we keep duration low and keep a high bar for new longs in our credit book.
Our credit beta is the lowest since 2022, off a combination of low net exposure and reduced weight in higher beta segments, such as financials and emerging markets. Our duration is 2.2y. Our yield to call is 5.6%. Our current positioning means we benefit from a correction in rates and risk in 1Q25 and have space to add risk in our cash book in this instance.
Macro uncertainty will remain incredibly elevated in 2025, translating into persistent volatility across rates and credit. We strongly believe a flexible and reactive approach to fixed income will continue to make a difference.
More in detail:
Note: Indices are used to illustrate the relevant asset class.
Financial Credit Strategy
November turned out to be a constructive month for risk assets despite the cautious tone in markets going into the US elections driven by concerns around the potential un-anchoring of long-end US rates. For the time being, the market seems to be giving some benefit of the doubt to a more dovish US policy overall despite what undoubtedly seems like a more hawkish current stance around tariffs. Early indications with respect to geopolitical and trade developments are apprehensively positive but the new administration has yet to be sworn in and the impact of future policies is unknown.
US markets outperformed broader equity indices, rising c7.5% on average to YTD gains of c25% with the banking sector the clear stand-out, +14% MoM to +48% YTD. This was in sharp contrast to Europe where ongoing macroeconomic weakness and geopolitical concerns are weighing on equity markets; EuroStoxx was unchanged on the month, +10% YTD, with European Banks -1.5% MoM to end +27% YTD. That said, European financials’ credit performance decoupled from equities with spreads up to 5bps tighter across the capital structure and AT1s +50c, in part driven by 15-25bps tightening across European rates’ curves.
European banks wrapped up their 3Q24 results season with no material surprises from the peers that had reported in the previous month. The standout, and surprising, trend is that lower interest rates are not yet translating into operating income headwinds as banks are proving quite resilient in tapping other sources of revenues away from net interest income. Furthermore, concerns around asset qualities have been put on the backburner once again as the little deterioration that materialised was largely insignificant although forward guidance needs to be monitored given what is expected to be a slowdown in economic activity.
Away from results, European financials landscape benefited from further positive developments along the M&A and ratings uplift fronts. In Spain, BBVA’s approach for Sabadell might have to take another 6-months as the process was pushed into a second phase where a more detailed analysis will need to be undertaken. In Italy, several fronts were opened which highlight how ripe the sector remains for further consolidation as the easier income uplift from higher rates is coming to an end.
Primary activity roared back in November with EUR70bn issuance some 25% higher than last year and mainly concentrated (c55%) in the secured format. Interestingly, it was the busiest month for capital going back at least 6 years with 18 new securities totalling EUR14bn as issuers opportunistically took advantage of market levels and investor appetite. Our participation in these trades has become more discerning given some of their idiosyncratic features such as historically low reset rates for given issuers.
Financial Equity Strategy
In November, US banks rallied strongly in the wake of a presidential victory by Donald Trump and a Congressional sweep by Republicans. Large and small banks finished the month up 13% and 14%, respectively, while the S&P 500 advanced about 6%. Notably, post a surge on the day following the election, large banks were up just another 2%, which was in-line with the overall market, while small banks were flat. As we have written previously, there are numerous potential tailwinds for US banks under a Trump administration; these include a more favorable regulatory environment, increased M&A activity, higher levels of capital return, stronger loan growth alongside economic expansion, and a steeper yield curve. However, the size and speed of the rally, and resulting P/E expansion to levels above historical long-term averages, clearly has embedded at least some of these potential catalysts. Furthermore, it is important to compare these levers to current estimates in gauging further potential upside. Regarding loan growth, for example, consensus already expects roughly 4% growth in each of the next two years which would be a notable acceleration from the flattish growth the banks have been putting up over the last 18 months. Interestingly, post Trump’s first win in November 2016, annual loan growth of the big banks slowed from prior years – 6% in 2014, 8% in 2015, and over 6% in 2016 – to less than 4% in 2017; while there were other dynamics at play, such as rates coming off of the zero bound at that time, it is not a foregone conclusion that Trump’s policies will stimulate outsized growth. In terms of the impact of a new regulatory regime, it is quite plausible that new personnel will lead to a finalized Basel III Endgame that is capital neutral to the group overall (though the GSIBs are likely to see some increase). This would be welcome news given banks would have more flexibility to lend and return excess capital via buybacks; however, consensus is already calling for many large banks to increase payout ratios to near 100% and retire 5-10% or more of shares by the end of 2026 (not to mention that valuations are at levels deemed unattractive for buybacks by some such as Jamie Dimon at JPMorgan). A steeper curve would certainly be beneficial to most banks all else equal, especially after the earnings pain caused by the lengthy inversion of the last two years. Here too, though, estimates are already reflecting at least some of this benefit, especially those most positively geared to a steeper curve. For instance, numerous banks are expected to see 15-20% expansion in the run-rate of their quarterly net interest income by 4Q26 vs. current levels (with small banks even higher). Lastly, cost of risk is expected to stay benign with 2025 in-line with 2024 levels before improving from those already low levels in 2026.
To be clear, we are not suggesting that the expected catalysts under Trump will not play out, and that may not be further upside estimates and the stocks. To that point, we continue to own shares in banks that we believe are positioned well, both for idiosyncratic reasons and also relative to the likely environment under this administration. Additionally, M&A activity is likely to pick up, and indeed there already has been an increased pace of smaller deals. We expect that owning well-positioned strong buyers will be a sound strategy this cycle, and we are also focused on owning small banks with valuable deposit franchises. Overall, however, we believe some caution is warranted after this rally and have rotated some of the fund to segments offering more clear value such as US life insurance.
For all the talk about US M&A surging post the election, we have yet to see much in the way of meaningful transactions yet – except in Europe, where deal activity has truly taken off. Following the activity from BBVA and UniCredit in Spain and Germany respectively, November brought more action in European financials M&A with UniCredit placing a bid on domestic peer Banco BPM, and then in the UK, Aviva placed no fewer than three bids in a week to force the hand of the board at Direct Line. We are shareholders of both targets, and think UniCredit will have to similarly up its bid but expect this to play out over the next several months. Direct Line was perhaps the more notable deal as unlike the bank deals, Aviva is paying a very meaningful premium (over 70%), and yet the acquiring stock is still performing fine (roughly flat since announcement). The market is clearly in favor of the deal for Aviva, viewing it as a sensible strategic and financial transaction that should provide significant earnings accretion. We would be quite surprised if there were not similar deals in the insurance space, particularly in the small/midcap arena where we have concentrated our exposures.
Sustainable Equity Strategy
Global equity markets have been strongly up in November, with MSCI World index (in EUR terms) up 6.9% (YTD +25%).
Algebris Sustainable World Fund was up 5.2% in November, bringing YTD return to +14%. The return for the month has been driven by the strong performance of Copart (global company that provides online vehicle auction and remarketing service), McKesson (US company which distributes pharmaceuticals, medical-surgical supplies, and health and beauty care products throughout North America) and Vertiv (leading AI infrastructure player with sustainable competitive differentiation in data center power and thermal management).
In terms of portfolio activity, we started on nVent, which designs, manufactures, markets, installs and services high performance products and solutions that connect and protect sensitive equipment, buildings and critical process. We also added SPX Technologies, global supplier of infrastructure equipment with scalable growth platforms in heating, ventilation and air conditioning (HVAC), detection and measurement, and engineered solutions.
The performance has been driven by our top-down fundamental approach due to 1/ significant EPS acceleration in light of the remarkable resilience of the global economy especially for the ESG themes we play out, 2/ inflation converging back towards its targets and ability to companies in our portfolio to keep strong gross margins 3/ 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