How we did in September: The fund returned between 1.35% and 0.92% across different share classes, compared to EUR HY (BAML HE00 Index) 1.0%, US HY (BAML H0A0 Index) 1.6% and EM sovereign credit (BAML EMGB Index) 1.9%. Performance in September, gross of fees in EUR, was: (i) Credit: 1.7%, with 1.85% from cash bonds and -19bp from CDS; (ii) Rates: -10bps; (iii) FX: -1bps, (iv) Equity: -20bps and (v) Other: 0bps.
What we are doing now: In September, credit markets continued to grind despite an ample wall of worry from domestic politics to international conflict. While credit spreads closed the month broadly where they started, the continued easing stance from the ECB and the first cut from the Fed supported another positive month.
We continue to see markets as fragile, with a slowing macro picture and risk assets at highs. There is limited upside, and it will not take much to turn investors who are nervously long into sellers. Market fragility is amplified by recession being fully priced in rates markets: duration won’t be a hedge in the next selloff. With credit spreads very close to 2024 tights, one could reasonably posit that a credit market pullback is coming – catalysts could come in the form of election results uncertainty.
That said, we continue to see opportunities, especially in credit. All-in yields and dispersion are both high. As stated in our latest Algebris Bullet, we believe it is time to reduce market and duration beta and focus on active alpha-generation in our strategies.
As a result, we keep net exposure relatively low, close to 40%, and add some protection in rates too. Fund duration is now 1.7y, vs almost 3y in July. Fiscal woes add to duration risks into US elections. Our YTC is at 5.7% despite a low net exposure, as we run protection in tight indexes. We run ~16% cash allocation.
More in detail:
The Fund blended YTC is 5.7%, with average rating of BBB-.
The Fund duration is now 1.7y, below our two-year average.
Our net credit exposure is 43%. We currently run ~16% cash, and hold protection via US IG, US HY, EU HY, EM spreads.
Net exposure in financials (incl. cash short and single name CDS) represents 30% of the book. The asset class outperformed since October. We remain constructive but reduce some of the winners.
Net corporates exposure (incl. cash short and single name CDS) represents 34% 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 11% of the book. EM local is currently 4% of the fund.
Financial Credit Strategy
It was another positive month for risk assets, buoyed by the FED’s decision to finally start its easing cycle, amid a mixed backdrop for growth and stable, low inflation prints. Whilst markets were finely poised between a 25bps or 50bps reduction in interest rates heading into the meeting, the FED delivered the latter as it looked to reassure that it would react quickly to any signs of deterioration in the US economy.
Market expectations are now projecting between two to three rate cuts by year end, which would imply potentially a further 100bps reduction in interest rates. Whilst the US equity indices, NASDAQ (+2.8%) and S&P500 (+2.1%) were amongst the best performers in September, they were nowhere close to the c18% surge witnessed in the Hang Seng and Shanghai Composite indices on the back of another stimulus package announced by the Chinese government. Credit markets latched onto this wider risk-on sentiment as AT1s edged up 2 pts on average, with the more senior parts of the capital structure including Tier 2s tighter by 5-10 bps.
Consolidation returned to the fore of the European financial sector in September. Unicredit made known its interest in Commerzbank by acquiring an initial 9% stake in the bank, of which 4.5% sold by the German government, and subsequently built it up to 21% through a combination of derivatives, subject to the approval of the ECB. Whilst management from both banks, including a newly promoted CEO for Commerzbank, have engaged in discussions, the path to consolidation is not without its challenges given the vocal objections from the Unions, represented on the Commerzbank board, and certain members of the German government. A takeover deal, which would be accretive in our view given the long standing presence of Unicredit in the country through HVB, is largely seen as a test for European integration, thus a potential catalyst for further M&A. In the meantime, Unicredit continues to shore up its fee-based franchise as it looks set to internalise existing Life insurance agreements with CNP and Allianz at an immaterial c20bps impact to its capital position.
On the regulatory front, the Australian regulator APRA is proposing to phase out AT1s from Australian banks’ capital structure after a long anticipated review of the asset class. According to APRA, there is a particularly high percentage of bonds owned by retail investors (c53%) which is unsurprising given the significantly lower minimum denominations of c90% of the outstanding Australian AT1s (AUD100 versus European banks’ EUR/GBP/USD200,000). We believe this means there should be a limited, if any, read-across to European AT1s; however, in the scenario that there would be, an orderly grandfathering / transition of existing European AT1s into a new form of loss absorbing “capital” would take place. Responses to the discussion paper are due by early November with an update to be provided by APRA towards year-end.
As in previous Septembers, primary activity picked up significantly to almost EUR50bn, broadly in line with the same amount of issuance as September last year. However, along the lines of what we have seen in previous months this year, the composition of issuance has changed with greater emphasis put on capital instruments; YTD the share of subordinated instruments, namely Tier 2 and AT1s, has doubled to c20% / EUR70bn. September was no exception with more than three times as much capital instruments (EUR13bn vs EUR4bn last year) coming to the market as issuers took advantage of the constructive tone to front-load refinancing needs for next year.
As of today, c35% of next year’s AT1 calls have already been addressed, either through LMEs or replacement / refinancing transactions, with some going as far out as December 2025. From a credit perspective, this technical should remain supportive for the European financials sector as it provides more certainty around call dates and net issuance remains flat.
Financial Equity Strategy
Less than a month remains before election day in the US, the results of which are likely to significantly influence the performance of financial stocks. Following President Biden’s poor debate performance in late June, and the assassination attempt of former President Trump two weeks later, US financials performed strongly in July as the odds of a Trump victory increased; indeed, regional banks were up over 20% and large banks up over 10% compared to a flat S&P 500. Over the past two months, however, banks have underperformed, likely due at least in part to Vice President Harris’ surge in the polls which now has the two candidates in a virtual tie. A Republican presidency, and even more so a full Republican sweep, will likely be viewed positively for financials given the expected appointment of industry-friendly regulatory leadership which should result in increased M&A and reduced regulatory burdens. For perspective, the heads of eight major regulatory agencies could be replaced immediately. Moreover, Republicans could work to reshape the Federal Reserve in 2026 with the terms of both Chair Powell and Vice Chair Barr ending. Bank M&A has slowed dramatically under the Biden administration as deal approvals have become timelier and more uncertain. Under a lighter regulatory touch and less restrictive anti-trust stance, deal activity is likely to increase notably. Furthermore, regulatory scrutiny of capital levels, compliance requirements, fees and so forth are likely to be softened, all of which bode well for capital return and efficiency. Lastly, banks and other financials traded at higher relative multiples under Trump relative to Biden (with the discrepancy being especially notable for regional banks), offering the potential for meaningful re-rating post-election. While a Republican sweep is not the base case, it is a plausible scenario that could lead to notable upside for the sector.
Sustainable Equity Strategy
Global equity markets ended September higher (+1%, YTD +18%), still benefiting from the prospects of a soft landing of the economy and inflation increasingly close to central banks’ targets. The Fed surprised markets by starting the monetary expansion cycle with a rate cut of 50bps instead of 25bps, while the announcement of a coordinated package of monetary and fiscal measures in China, aimed at countering weakness in the real estate market, further supported gains. Moreover, The Chinese equity market reacted positively to these measures, with the MSCI China index rising >+20% since mid-September, bringing the 2025E P/E to 10x. The package (estimated at over € 450bn) covers various areas, including liquidity, rates, real estate and equity markets, and banks’ capital. After a very difficult first week of September, American and European indices were positive with S&P500 +1.4%, Nasdaq +2%, Eurostoxx600 -0.3%, DAX +3%, CAC +2% FTSEMIB -0.6%.
The Algebris Sustainable World was up 50bps in the month bringing YTD return to ca 12% (B EUR share class). The return for the month has been driven by the strong performance of Eaton (US-based power management company doing business in more than 175 countries), Quanta Services (US company that engages in the provision of comprehensive infrastructure solutions to the electric power, oil and gas, communication, pipeline, and energy industries) and Trane Technologies (US company which provides HVAC and transportation refrigeration solutions in the Americas, EMEA, and Asia Pacific regions).In terms of portfolio activity, we started on Mckesson which distributes pharmaceuticals, medical-surgical supplies, and health and beauty care products throughout North America while we cut Simpson as we expect another significant round of earning cuts.
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.
Global Credit Strategy
How we did in September: The fund returned between 1.35% and 0.92% across different share classes, compared to EUR HY (BAML HE00 Index) 1.0%, US HY (BAML H0A0 Index) 1.6% and EM sovereign credit (BAML EMGB Index) 1.9%. Performance in September, gross of fees in EUR, was: (i) Credit: 1.7%, with 1.85% from cash bonds and -19bp from CDS; (ii) Rates: -10bps; (iii) FX: -1bps, (iv) Equity: -20bps and (v) Other: 0bps.
What we are doing now: In September, credit markets continued to grind despite an ample wall of worry from domestic politics to international conflict. While credit spreads closed the month broadly where they started, the continued easing stance from the ECB and the first cut from the Fed supported another positive month.
We continue to see markets as fragile, with a slowing macro picture and risk assets at highs. There is limited upside, and it will not take much to turn investors who are nervously long into sellers. Market fragility is amplified by recession being fully priced in rates markets: duration won’t be a hedge in the next selloff. With credit spreads very close to 2024 tights, one could reasonably posit that a credit market pullback is coming – catalysts could come in the form of election results uncertainty.
That said, we continue to see opportunities, especially in credit. All-in yields and dispersion are both high. As stated in our latest Algebris Bullet, we believe it is time to reduce market and duration beta and focus on active alpha-generation in our strategies.
As a result, we keep net exposure relatively low, close to 40%, and add some protection in rates too. Fund duration is now 1.7y, vs almost 3y in July. Fiscal woes add to duration risks into US elections. Our YTC is at 5.7% despite a low net exposure, as we run protection in tight indexes. We run ~16% cash allocation.
More in detail:
Financial Credit Strategy
It was another positive month for risk assets, buoyed by the FED’s decision to finally start its easing cycle, amid a mixed backdrop for growth and stable, low inflation prints. Whilst markets were finely poised between a 25bps or 50bps reduction in interest rates heading into the meeting, the FED delivered the latter as it looked to reassure that it would react quickly to any signs of deterioration in the US economy.
Market expectations are now projecting between two to three rate cuts by year end, which would imply potentially a further 100bps reduction in interest rates. Whilst the US equity indices, NASDAQ (+2.8%) and S&P500 (+2.1%) were amongst the best performers in September, they were nowhere close to the c18% surge witnessed in the Hang Seng and Shanghai Composite indices on the back of another stimulus package announced by the Chinese government. Credit markets latched onto this wider risk-on sentiment as AT1s edged up 2 pts on average, with the more senior parts of the capital structure including Tier 2s tighter by 5-10 bps.
Consolidation returned to the fore of the European financial sector in September. Unicredit made known its interest in Commerzbank by acquiring an initial 9% stake in the bank, of which 4.5% sold by the German government, and subsequently built it up to 21% through a combination of derivatives, subject to the approval of the ECB. Whilst management from both banks, including a newly promoted CEO for Commerzbank, have engaged in discussions, the path to consolidation is not without its challenges given the vocal objections from the Unions, represented on the Commerzbank board, and certain members of the German government. A takeover deal, which would be accretive in our view given the long standing presence of Unicredit in the country through HVB, is largely seen as a test for European integration, thus a potential catalyst for further M&A. In the meantime, Unicredit continues to shore up its fee-based franchise as it looks set to internalise existing Life insurance agreements with CNP and Allianz at an immaterial c20bps impact to its capital position.
On the regulatory front, the Australian regulator APRA is proposing to phase out AT1s from Australian banks’ capital structure after a long anticipated review of the asset class. According to APRA, there is a particularly high percentage of bonds owned by retail investors (c53%) which is unsurprising given the significantly lower minimum denominations of c90% of the outstanding Australian AT1s (AUD100 versus European banks’ EUR/GBP/USD200,000). We believe this means there should be a limited, if any, read-across to European AT1s; however, in the scenario that there would be, an orderly grandfathering / transition of existing European AT1s into a new form of loss absorbing “capital” would take place. Responses to the discussion paper are due by early November with an update to be provided by APRA towards year-end.
As in previous Septembers, primary activity picked up significantly to almost EUR50bn, broadly in line with the same amount of issuance as September last year. However, along the lines of what we have seen in previous months this year, the composition of issuance has changed with greater emphasis put on capital instruments; YTD the share of subordinated instruments, namely Tier 2 and AT1s, has doubled to c20% / EUR70bn. September was no exception with more than three times as much capital instruments (EUR13bn vs EUR4bn last year) coming to the market as issuers took advantage of the constructive tone to front-load refinancing needs for next year.
As of today, c35% of next year’s AT1 calls have already been addressed, either through LMEs or replacement / refinancing transactions, with some going as far out as December 2025. From a credit perspective, this technical should remain supportive for the European financials sector as it provides more certainty around call dates and net issuance remains flat.
Financial Equity Strategy
Less than a month remains before election day in the US, the results of which are likely to significantly influence the performance of financial stocks. Following President Biden’s poor debate performance in late June, and the assassination attempt of former President Trump two weeks later, US financials performed strongly in July as the odds of a Trump victory increased; indeed, regional banks were up over 20% and large banks up over 10% compared to a flat S&P 500. Over the past two months, however, banks have underperformed, likely due at least in part to Vice President Harris’ surge in the polls which now has the two candidates in a virtual tie. A Republican presidency, and even more so a full Republican sweep, will likely be viewed positively for financials given the expected appointment of industry-friendly regulatory leadership which should result in increased M&A and reduced regulatory burdens. For perspective, the heads of eight major regulatory agencies could be replaced immediately. Moreover, Republicans could work to reshape the Federal Reserve in 2026 with the terms of both Chair Powell and Vice Chair Barr ending. Bank M&A has slowed dramatically under the Biden administration as deal approvals have become timelier and more uncertain. Under a lighter regulatory touch and less restrictive anti-trust stance, deal activity is likely to increase notably. Furthermore, regulatory scrutiny of capital levels, compliance requirements, fees and so forth are likely to be softened, all of which bode well for capital return and efficiency. Lastly, banks and other financials traded at higher relative multiples under Trump relative to Biden (with the discrepancy being especially notable for regional banks), offering the potential for meaningful re-rating post-election. While a Republican sweep is not the base case, it is a plausible scenario that could lead to notable upside for the sector.
Sustainable Equity Strategy
Global equity markets ended September higher (+1%, YTD +18%), still benefiting from the prospects of a soft landing of the economy and inflation increasingly close to central banks’ targets. The Fed surprised markets by starting the monetary expansion cycle with a rate cut of 50bps instead of 25bps, while the announcement of a coordinated package of monetary and fiscal measures in China, aimed at countering weakness in the real estate market, further supported gains. Moreover, The Chinese equity market reacted positively to these measures, with the MSCI China index rising >+20% since mid-September, bringing the 2025E P/E to 10x. The package (estimated at over € 450bn) covers various areas, including liquidity, rates, real estate and equity markets, and banks’ capital. After a very difficult first week of September, American and European indices were positive with S&P500 +1.4%, Nasdaq +2%, Eurostoxx600 -0.3%, DAX +3%, CAC +2% FTSEMIB -0.6%.
The Algebris Sustainable World was up 50bps in the month bringing YTD return to ca 12% (B EUR share class). The return for the month has been driven by the strong performance of Eaton (US-based power management company doing business in more than 175 countries), Quanta Services (US company that engages in the provision of comprehensive infrastructure solutions to the electric power, oil and gas, communication, pipeline, and energy industries) and Trane Technologies (US company which provides HVAC and transportation refrigeration solutions in the Americas, EMEA, and Asia Pacific regions).In terms of portfolio activity, we started on Mckesson which distributes pharmaceuticals, medical-surgical supplies, and health and beauty care products throughout North America while we cut Simpson as we expect another significant round of earning cuts.
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.